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F A R M E R S N A T I O N A L B A N C C O R P. | A N N U A L R E P O R T 2 0 1 7
A N N U A L R E P O R T 2 0 1 7
Corporate Profile
Farmers National Banc Corp. (the “Company”) is a multi-bank holding company registered under the Bank
Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally
chartered subsidiary, The Farmers National Bank of Canfield (“Farmers National Bank”.) The Company provides
trust services through its subsidiary, Farmers Trust Company, retirement planning and consultancy services
through its subsidiary, National Associates, Inc. and insurance services through Farmers National Bank’s
subsidiaries, Farmers National Insurance, LLC, and Bowers Insurance Agency, LLC. Farmers Trust Company
has a state-chartered bank license to conduct trust business from the Ohio Department of Commerce – Division
of Financial Institutions.
Farmers National Bank, chartered in 1887, is a full-service financial services company engaged in commercial
and retail banking with a total of forty-one (41) locations and four (4) trust offices located in the counties of
Mahoning, Trumbull, Columbiana, Stark, Summit, Wayne, Medina, Holmes and Cuyahoga in the State of
Ohio and Beaver in Pennsylvania. In addition, Farmers National Bank provides 24-hour access to a network
of Automated Teller Machines and offers online, mobile and telephone banking services. Farmers National
Bank competes with state and national banks, as well as with a large number of other financial institutions,
such as thrifts, insurance companies, consumer finance companies, credit unions and commercial finance
leasing companies for deposits, loans and other financial service businesses. The principal methods by which
Farmers National Bank competes are loan interest rates, the rates paid for funds, the fees charged for services
and the availability of services.
As a national banking association, Farmers National Bank is a member of the Federal Reserve System, is
subject to the supervision and regulation of the Office of the Comptroller of the Currency, and deposits are
insured by the Federal Deposit Insurance Corporation to the extent provided by law.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are not historical facts, but rather statements based on Farmers’ current
expectations regarding its business strategies and its intended results and future performance. Forward-
looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar
expressions, as well as any statements related to future expectations of performance or conditional verbs,
such as “will,” “would,” “should,” “could” or “may.”
Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could
cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from
those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these
differences include, without limitation, general economic conditions, including changes in market interest rates
and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes;
competitive conditions in the banking markets served by Farmers’ subsidiaries; the adequacy of the allowance
for losses on loans and the level of future provision for losses on loans; and other factors disclosed periodically
in Farmers’ filings with the SEC.
Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to
place undue reliance on them, whether included in this report or made elsewhere from time to time by Farmers
or on Farmers’ behalf. Farmers assumes no obligation to update any forward-looking statements.
Financial Highlights
(Amounts in Thousands Except for Per Share Data)
For the Year
Net Income
Return on Average Assets
Return on Average Equity
Cash Dividends
Per Share
Net Income (Basic)
Net Income (Diluted)
Book Value at Year-end
Balances at Year-End
Total Assets
Earning Assets
Total Deposits
Net Loans
Total Stockholders’ Equity
2017
$22,711
1.09%
9.92%
6,012
2016
$20,557
1.07%
9.72%
4,324
2015
$8,055
0.54%
4.97%
2,683
$0.82
0.82
8.79
$0.76
0.76
7.88
$0.36
0.36
7.35
$2,159,069
1,998,245
1,604,719
1,565,066
242,074
$1,966,113
1,819,455
1,524,756
1,416,783
213,216
$1,869,902
1,735,843
1,409,047
1,287,887
198,047
Common Shares Outstanding
27,544
27,048
26,944
Annual Meeting Notice
The Annual Meeting of Shareholders will be held at the St. Michael Family Life Center
at 300 North Broad Street, Canfield, OH 44406 at 3:30pm EST, on Thursday, April 19, 2018.
1
ANNUAL REPORT 2017
Reaching new heights...exceeding expectations.
Dear Fellow Shareholders,
Innovators refuse
to accept limits.
Whether in business
or technology, those
who achieve do so
despite the constant
cry of cynics, who
say “greatness is
u n a c h i e v a b l e . ”
And still every day, we hear stories of
new, successful change management
approaches where businesses deploy
continual, incremental performance and
process improvements as a long-term
competitive strategy.
And so it is with Farmers. Because, even
though your company has routinely performed
well over the years, 2017 surpassed all
previous expectations and reached new
heights that some may have believed
unlikely…if not impossible.
2017 was a record-breaking year for
Farmers on several fronts and is a result of
our dynamic-platform and the successful
execution of our strategic growth objectives.
2017’s historic performance now becomes
the yardstick we will use to measure our future
achievements, and I am excited about the
direction we are headed.
There are many contributing factors to
Farmers’ success over the past year, and I
am happy to share them with you.
Profitability
Asset growth led to record profitability, and
in 2017 net income increased 10.5% to a
record $22.7 million. Net income would
have been even higher had it not been for
the approximately $1.8 million reduction in
our deferred tax asset, as a result of the 2017
Tax Cuts and Jobs Act.
Reflecting continual asset growth since
2012, net income has increased at a five-
year CAGR (compound annual growth
rate) of 18%. In addition, Farmers’ Return
on Average Assets increased from 0.89%
in 2012 to 1.09% last year and our Return
on Average Equity increased from 8.42% to
9.92% over the same time period. Excluding
the approximately $1.8 million adjustment
of the net deferred tax asset, offset by net
acquisition-related adjustments of $283
thousand, the Return on Average Assets and
Return on Average Equity would have been
1.19% and 10.83%, respectively.
Asset Size
Since 2012, Farmers’ asset size has increased
to a record $2.2 billion, representing a five-
year CAGR of 13.6%. This growth has
positioned Farmers as the eleventh largest
financial institution headquartered in the
state of Ohio. The company’s expansion is
a direct result of our ability to capitalize on
economic growth in our local markets by
offering community banking and financial
services that are unique among our peers.
In addition, strategic acquisitions of three
banking institutions and an insurance agency
accelerated our growth and provided the
company with enhanced resources to
capture new market share. Attracting new
business and expanding our competitive
position allows us to better execute regulatory,
compliance and IT improvements that serve
and protect the needs of all customers—new
and established.
Loans
Farmers’ loan portfolio grew by more than
10% over 2017, and loans now comprise
77.7% of the Bank’s average earning assets
for the year ended December 31, 2017, a
140-basis point improvement over the past
12 months. While loan growth continues
to increase at a strong pace, asset quality
remains strong in keeping with the company’s
prudent management philosophies. During
2017, we experienced declines in non-
performing loans as a percentage of past
due loans, and further diversified our loan
portfolio. Agriculture, Commercial Real
Estate, Commercial and Industrial, and
Commercial loans make up 56% of the total
loan portfolio and this cohort of loans grew
by a collective 14% over the last 12 months.
Supporting our local communities is a
fundamental value at Farmers and I am
extremely proud of our Small Business
Express Loan product, which benefits
borrowers by providing customers with
the ability to close a loan on the day of
application. During 2017, Small Business
Express Loans increased 43%, reflecting
the value of Farmers’ quick application and
decision-making process.
Mortgage loans continue to be a vital
part of our business. Income from the sales
8
increased % over the
of these loans
the residential
preceding year and
mortgage portfolio grew by % in 2017.
9
Trust Company and Wealth Management
2017 marked two milestones for Trust and
Wealth Management. First, it was a record-
breaking year for the trust company as client
assets under management grew by 8% to
2
ANNUAL REPORT 2017
exceed $1.2 billion. Revenues and operating
income also topped all-time-highs, growing
5% and 14%, respectively. And net income
for the year grew by 32% to total $1.1 million.
This past year also welcomed Chief Wealth
Officer Mark Wenick to Farmers. Mark has
worked aggressively and effectively in
creating synergies among all divisions of
Wealth Management, and this important
facet of our company is now operating as
one comprehensive and collaborative unit.
Market Capitalization
As you can see, a lot of factors contributed
to 2017’s success, which has not gone
unnoticed. The significant growth in
profitability and successful execution of
Farmers’ growth-oriented strategic plan,
has driven a meaningful increase in the
company’s market value. Farmers ended
2017 with a market capitalization of $406.3
million, an increase of nearly 250% from
$116.6 million at the end of 2012. This
impressive gain compares favorably to the
performance of both the Nasdaq Bank Index
and Russell 2000 over this timeframe.
In addition, since 2012, Farmers has disbursed
$17.5 million in cumulative dividends. We
remain committed to creating value for and
returning capital to shareholders, and I am
extremely pleased to report that Farmers’
current annualized dividend payout is the
highest it has been since 2009.
Culture
What is not found in the figures and
percentages above is Farmers’ culture.
Culture is difficult to quantify yet vitally
important to our company’s future success.
I believe that a strong and positive culture
of engaged associates—where everyone
on the Farmers team “does the right thing
when no one is looking” and enjoys the
workplace in the process—drives increased
performance and profitability. I am not alone
in this belief. Organizations such as Gallup,
the Harvard Business Review and others
have all come to the same research-proven
conclusion: building the right culture yields
tangible benefits. The management team
and I will continue to explore innovative
ways to grow an institutional culture strong
enough to become the very backbone
supporting all future growth. In addition, as
our acquisition strategy continues, we will
seek out companies that have similar cultures
and community-oriented values.
I hope you share my enthusiasm for our
company’s record-shattering achievements
over the last year. Farmers will always
measure itself against its competitors. It’s an
unavoidable requirement in today’s investor
environment. However, we’ve come to a time
in our evolution as a company where “beating
the other guy” is the less important motivation.
The race toward excellence we are in today
is against ourselves. We remain committed
to continual improvement and to pushing
ourselves to beat our last, best performance.
Very truly yours,
Kevin J. Helmick
President & Chief Executive Officer
3
ANNUAL REPORT 2017 Top Row from Left to Right: Ralph D. Macali, Gregg Strollo, Terry A. Moore, Anne Frederick Crawford, Gregory C. Bestic,
David Z. Paull and Earl R. Scott
Bottom Row from Left to Right: Edward W. Muransky, Kevin J. Helmick, Lance J. Ciroli and James R. Smail
Board of Directors
Lance J. Ciroli 4, 5
Chairman of the Board
Co-founder of NBE Bank Consulting
Services. Retired Assistant Deputy
Comptroller in the Cleveland/Detroit
Field Office, Office of the Comptroller
of the Currency
James R. Smail 2, 4, 5
Vice Chairman of the Board
Chairman, Director and CEO
J.R. Smail, Inc.
Gregory C. Bestic 1, 3
CPA, CGMA, Certified Forensic Accountant,
DABFA, FACFEI
Principal with Schroedel, Scullin & Bestic,
LLC - Certified Public Accountants and
Strategic Advisors
Anne Frederick Crawford 2, 3
Attorney-at-Law
Self-employed/Sole Proprietor
Kevin J. Helmick 5
President and Chief Executive Officer
Farmers National Bank
Ralph D. Macali 1, 3
Vice President of Palmer J. Macali, Inc.
Partner in P.M.R.P. Partnership
Terry A. Moore 2, 3, 5
Managing Director of Krugliak, Wilkins,
Griffiths and Dougherty
David Z. Paull 2, 4
Retired Vice President, Human Resources
Operations and Labor Relations, RTI
International Metals, Inc.
Earl R. Scott 1, 2
Certified Public Accountant (CPA) and
Principal, Packer Thomas
Gregg Strollo 1, 4
Partner, Architect and President,
Strollo Architects
Edward W. Muransky 3, 4
CEO, Chestnut Land Company
1 Audit Committee
2 Compensation Committee
3 Corporate Governance and Nominating Committee
4 Board Enterprise Risk Management Committee
5 Executive Committee
4
ANNUAL REPORT 2017
Farmers National Banc Corp. Officers
Kevin J. Helmick,
President and Chief Executive Officer
Carl D. Culp,
Senior Executive Vice President, Secretary & Treasurer
Management Team and Board of Directors
Kevin J. Helmick,
President and Chief
Executive Officer
Farmers National Bank
Mark Witmer,
Senior Executive
Vice President and
Chief Banking Officer
Farmers National Bank
Carl D. Culp,
Senior Executive
Vice President,
Cashier and Chief
Financial Officer
Farmers National Bank
Mark L. Graham,
Executive Vice
President, Chief
Credit Officer
Farmers National Bank
Amber Wallace,
Executive Vice President,
Chief Retail and
Marketing Officer
Farmers National Bank
Mark J. Wenick,
Executive Vice President,
Chief Wealth
Management Officer
Farmers National Bank
Joseph Gerzina,
Senior Vice President,
Chief Lending Officer,
Regional President-West
Farmers National Bank
Brian E. Jackson,
Senior Vice President,
Chief Information Officer
Farmers National Bank
Mark Nicastro,
Senior Vice President,
Chief Human
Resources Officer
Farmers National Bank
Timothy Shaffer,
Senior Vice President,
Regional President-East
Farmers National Bank
Michael Oberhaus,
Vice President,
Chief Risk Officer
Farmers National Bank
5
ANNUAL REPORT 2017 [THIS PAGE INTENTIONALLY LEFT BLANK]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 001-35296
Farmers National Banc Corp.
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
20 South Broad Street, Canfield, Ohio
(Address of principal executive offices)
34-1371693
(I.R.S. Employer
Identification No.)
44406
(Zip Code)
Registrant’s telephone number, including area code: 330-533-3341
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, no par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
(Do not check if a smaller reporting company)
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of June 30, 2017, the estimated aggregate market value of the registrant’s common shares, no par value (the only common equity of the registrant), held
by non-affiliates of the registrant was approximately $392.5 million based upon the last sales price as of June 30, 2017 reported on NASDAQ. (The
exclusion from such amount of the market value of the common shares owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant).
As of March 1, 2018, the registrant had outstanding 27,554,207 common shares, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of the registrant’s definitive proxy statement for the 2018
Annual Meeting of Shareholders
Part of Form 10-K
into which
Document is Incorporated
III
FARMERS NATIONAL BANC CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
PART I
Item 1.
Business ....................................................................................................................................................... 1
Item 1A. Risk Factors ................................................................................................................................................. 13
Item 1B. Unresolved Staff Comments ........................................................................................................................ 21
Properties ..................................................................................................................................................... 21
Item 2.
Legal Proceedings........................................................................................................................................ 23
Item 3.
Mine Safety Disclosures .............................................................................................................................. 23
Item 4.
Item 5.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities...................................................................................................................................................... 24
Selected Financial Data................................................................................................................................ 25
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations...................... 30
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ....................................................................... 45
Item 8.
Financial Statements and Supplementary Financial Data............................................................................ 47
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................106
Item 9.
Item 9A. Controls and Procedures ..............................................................................................................................106
Item 9B. Other Information ........................................................................................................................................106
Item 10. Directors, Executive Officers and Corporate Governance ..........................................................................107
Item 11. Executive Compensation .............................................................................................................................109
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...109
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................110
Item 14. Principal Accountant Fees and Services ......................................................................................................110
PART III
Item 15. Exhibits, Financial Statement Schedules. ....................................................................................................110
Item 16. Form 10-K Summary ...................................................................................................................................110
SIGNATURES
114
PART IV
[THIS PAGE INTENTIONALLY LEFT BLANK]
PART I
Item 1. Business.
General
Farmers National Banc Corp.
Farmers National Banc Corp. (the “Company,” “Farmers,” “we,” “our” or “us”), is a financial holding
company and was organized as a one-bank holding company in 1983 under the laws of the State of Ohio and
registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Amendments to the BHCA
in 1999, allowed for a bank holding company to declare itself a financial holding company and thereby engage in
financial activities, including securities underwriting and dealing, insurance agency and underwriting activities, and
merchant banking activities. The Company made the declaration to become a financial holding company in 2016.
For a bank holding company to be eligible to declare itself a financial holding company, all of the depository
institution subsidiaries must be well-capitalized and well-managed and have satisfactory or better ratings under the
Community Reinvestment Act. The Company operates principally through its wholly-owned subsidiaries, The
Farmers National Bank of Canfield (the “Bank” or “Farmers Bank”), Farmers Trust Company (“Trust” or “Farmers
Trust”), National Associates, Inc. (“NAI”) and Farmers National Captive, Inc. (“Captive”). Farmers National
Insurance, LLC (“Insurance” or “Farmers Insurance”) and Farmers of Canfield Investment Co. (“Investments or
“Farmers Investments”) are wholly-owned subsidiaries of the Bank. The Company and its subsidiaries operate in
the domestic banking, trust, retirement consulting, insurance and financial management industries.
The Company’s principal business consists of owning and supervising its subsidiaries. Although Farmers
directs the overall policies of its subsidiaries, including lending practices and financial resources, most day-to-day
affairs are managed by their respective officers. Farmers and its subsidiaries had 445 full-time equivalent
employees at December 31, 2017.
The Company’s principal executive offices are located at 20 South Broad Street, Canfield, Ohio 44406, and its
telephone number is (330) 533-3341. Farmers’ common shares, no par value, are listed on the NASDAQ Capital
Market (the “NASDAQ”) under the symbol “FMNB.” Farmers’ business activities are managed and financial
performance is primarily aggregated and reported in three lines of business, the Bank segment, the Trust segment
and the Retirement Planning/Consulting segment. For a discussion of Farmers’ financial performance for the fiscal
year ended December 31, 2017, see the Consolidated Financial Statements and Notes to the Consolidated Financial
Statements found in Item 8 of this Annual Report on Form 10-K.
The Farmers National Bank of Canfield
During 2017, the Company acquired all outstanding stock of Monitor Bancorp, Inc. (“Monitor”), the holding
company of Monitor Bank. Additional discussion about the acquisition can be found in the Notes to Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K. The Bank is a full-service national banking
association engaged in commercial and retail banking mainly in Mahoning, Trumbull, Columbiana, Wayne, Holmes,
Medina and Stark Counties in Ohio and two locations in Beaver County, Pennsylvania. The Bank’s commercial and
retail banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage
and installment loans, home equity loans, home equity lines of credit, night depository, safe deposit boxes, money
orders, bank checks, automated teller machines, internet banking, travel cards, “E” Bond transactions, MasterCard
and Visa credit cards, brokerage services and other miscellaneous services normally offered by commercial banks.
A discussion of the general development of the Bank’s business and information regarding its financial
performance throughout 2017, is discussed in Item 7, Management Discussion and Analysis of Financial Condition
and Results of Operations of this Annual Report on Form 10-K.
The Bank faces significant competition in offering financial services to customers. Ohio has a high density of
financial service providers, many of which are significantly larger institutions that have greater financial resources
than the Bank, and all of which are competitors to varying degrees. Competition for loans comes principally from
savings banks, savings and loan associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. The most direct competition for deposits has
1
historically come from savings and loan associations, savings banks, commercial banks and credit unions.
Additional competition for deposits comes from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies.
Farmers Trust Company
During 2009, the Company acquired the Farmers Trust Company which offers a full complement of personal
and corporate trust services in the areas of estate settlement, trust administration and employee benefit plans.
Farmers Trust operates four offices located in Boardman, Canton, Howland and Wooster, Ohio.
National Associates, Inc.
National Associates, Inc. of Cleveland, Ohio has been a part of the Company since the 2013 acquisition. The
acquisition was part of the Company’s plan to increase the levels of noninterest income and to complement the
existing retirement services that were already being offered through the Trust company. NAI operates from its
office located in Fairview Park, Ohio
Farmers National Captive, Inc.
Farmers National Captive, Inc. was formed during 2016 and is a wholly-owned insurance subsidiary of the
Company that provides property and casualty insurance coverage to the Company and its subsidiaries. The Captive
pools resources with thirteen other similar insurance company subsidiaries of financial institutions to spread a
limited amount of risk among themselves and to provide insurance where not currently available or economically
feasible in today’s insurance market place. The Captive does not account for a material portion of the revenue and,
therefore, will not be discussed individually, but as part of the Company.
Farmers National Insurance, LLC
Farmers Insurance was formed during 2009 and offers a variety of insurance products through licensed
representatives. During 2016 the Bank completed the acquisition of the Bowers Insurance Agency, Inc. (“Bowers”).
The transaction involved both cash and stock. All activity has been merged into Insurance. Farmers Insurance is a
subsidiary of Farmers Bank and does not account for a material portion of the revenue and, therefore, will not be
discussed individually, but as part of the Bank.
Farmers of Canfield Investment Company
Farmers of Canfield Investment Company was formed during 2014, with the primary purpose of investing in
municipal securities. Farmers Investments is a subsidiary of Farmers Bank and does not account for a material
portion of the revenue and, therefore, will not be discussed individually, but as part of the Bank.
Investor Relations
The Company maintains an Internet site at http://www.farmersbankgroup.com, which contains an Investor
Relations section that provides access to the Company’s filings with the Securities and Exchange Commission (the
“Commission”). Farmers makes available free of charge on or through its website the Company’s annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such documents filed
or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as
reasonably practicable after the Company has filed these documents with the Commission. In addition, the
Company’s filings with the Commission may be read and copied at the Commission’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. These filings are also available on the Commission’s web-site at
http://www.sec.gov free of charge as soon as reasonably practicable after the Company has filed the above
referenced reports.
2
Supervision and Regulation
Introduction
The Company and its subsidiaries are subject to extensive regulation by federal and state regulatory agencies.
The regulation of financial holding companies and their subsidiaries is intended primarily for the protection of
consumers, depositors, borrowers, the Deposit Insurance Fund and the banking system as a whole and not for the
protection of shareholders. This intensive regulatory environment, among other things, may restrict the Company’s
ability to diversify into certain areas of financial services, acquire depository institutions in certain markets or pay
dividends on its common shares. It also may require the Company to provide financial support to its banking and
other subsidiaries, maintain capital balances in excess of those desired by management and pay higher deposit
insurance premiums as a result of the deterioration in the financial condition of depository institutions in general.
Significant aspects of the laws and regulations that have, or could have a material impact on Farmers and its
subsidiaries are described below. These descriptions are qualified in their entirety by reference to the full text of the
applicable statutes, legislation, regulations and policies, as they may be amended or revised by the U.S. Congress or
state legislatures and federal or state regulatory agencies, as the case may be. Changes in these statutes, legislation,
regulations and policies may have a material adverse effect on the Company and its business, financial condition or
results of operations.
Regulatory Agencies
Financial Holding Company. Farmers elected to be a financial holding company. A bank holding company
may elect to become a financial holding company if each of its subsidiary banks is well capitalized under the prompt
corrective action regulations of the FDIC, is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act of 1977 (the "CRA"). Financial holding companies may engage in activities that are
financial in nature, including affiliating with securities firms and insurance companies, which are not otherwise
permissible for a bank holding company.
As a financial holding company, Farmers is subject to regulation under the BHCA and to inspection,
examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”). The Federal Reserve Board has extensive enforcement authority over financial and bank holding
companies and may initiate enforcement actions for violations of laws and regulations and unsafe or unsound
practices. The Federal Reserve Board may assess civil money penalties, issue cease and desist or removal orders
and may require that a bank holding company divest subsidiaries, including subsidiary banks. Farmers is also
required to file reports and other information with the Federal Reserve Board regarding its business operations and
those of its subsidiaries.
Subsidiary Bank. The Bank is subject to regulation and examination primarily by the Office of the
Comptroller of the Currency (the “OCC”) and secondarily by the Federal Deposit Insurance Corporation (the
“FDIC”). OCC regulations govern permissible activities, capital requirements, dividend limitations, investments,
loans and other matters. The OCC has extensive enforcement authority over Farmers Bank and may impose
sanctions on Farmers Bank and, under certain circumstances, may place Farmers Bank into receivership.
Farmers Bank is also subject to certain restrictions imposed by the Federal Reserve Act and Federal Reserve
Board regulations regarding such matters as the maintenance of reserves against deposits, extensions of credit to
Farmers or any of its subsidiaries, investments in the stock or other securities of Farmers or its subsidiaries and the
taking of such stock or securities as collateral for loans to any borrower.
Non-Banking Subsidiaries. Farmers’ non-banking subsidiaries are also subject to regulation by the Federal
Reserve Board and other applicable federal and state agencies. In particular, Farmers National Insurance is subject
to regulation by the Ohio Department of Insurance, which requires, amongst other things, the education and
licensing of agencies and individual agents and imposes business conduct rules.
3
Securities and Exchange Commission and The NASDAQ Stock Market LLC. The Company is also under the
regulation and supervision of the Commission and certain state securities commissions for matters relating to the
offering and sale of its securities. The Company is subject to disclosure and regulatory requirements of the
Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act, and the regulations promulgated
thereunder. Farmers common shares are listed on the NASDAQ under the symbol “FMNB” and the Company is
subject to the rules for NASDAQ listed companies.
Federal Home Loan Bank. Farmers Bank is a member of the Federal Home Loan Bank of Cincinnati (the
“FHLB”), which provides credit to its members in the form of advances. As a member of the FHLB, the Bank must
maintain an investment in the capital stock of the FHLB in a specified amount. Upon the origination or renewal of a
loan or advance, the FHLB is required by law to obtain and maintain a security interest in certain types of collateral.
The FHLB is required to establish standards of community investment or service that its members must maintain for
continued access to long-term advances from the FHLB. The standards take into account a member’s performance
under the CRA and its record of lending to first-time home buyers.
The Federal Deposit Insurance Corporation. The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the
safety and soundness of the financial institution industry. The Bank’s deposits are insured up to applicable limits by
the Deposit Insurance Fund of the FDIC and subject to deposit insurance assessments to maintain the Deposit
Insurance Fund.
The FDIC may terminate insurance coverage upon a finding that an insured depository institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition, or has violated any applicable law, regulation,
rule, order or condition enacted or imposed by the institution’s regulatory agency.
Dodd-Frank Act - Basel III
In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy
standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant
provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-
based capital requirements, makes selected changes to the calculation of risk-weighted assets and adjusts the prompt
corrective action thresholds. Community banking organizations, such as the Company and the Bank, became
subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of
2015 through 2019.
The final rule:
•
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•
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•
Permits banking organizations that had less than $15 billion in total consolidated assets as of
December 31, 2009 to include in Tier 1 capital trust preferred securities and cumulative perpetual
preferred stock that were issued and included in Tier 1 capital prior to May 19, 2010, subject to a
limit of 25% of Tier 1 capital elements, excluding any non-qualifying capital instruments and
after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.
Establishes new qualifying criteria for regulatory capital, including new limitations on the
inclusion of deferred tax assets and mortgage servicing rights.
Requires a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%.
Increases the minimum Tier 1 capital to risk-weighted assets ratio requirement from 4% to 6%.
Retains the minimum total capital to risk-weighted assets ratio requirement of 8%.
Establishes a minimum leverage ratio requirement of 4%.
Retains the existing regulatory capital framework for 1-4 family residential mortgage exposures.
Permits banking organizations that are not subject to the advanced approaches rule, such as the
Company and the Bank, to retain, through a one-time election, the existing treatment for most
accumulated other comprehensive income, such that unrealized gains and losses on securities
available for sale will not affect regulatory capital amounts and ratios.
4
•
•
•
•
Implements a new capital conservation buffer requirement for a banking organization to maintain
a common equity capital ratio more than 2.5% above the minimum common equity Tier 1 capital,
Tier 1 capital and total risk-based capital ratios in order to avoid limitations on capital
distributions, including dividend payments, and certain discretionary bonus payments. The capital
conservation buffer requirement will be phased in beginning on January 1, 2016 at 0.625% and
will be fully phased in at 2.50% by January 1, 2019. A banking organization with a buffer of less
than the required amount would be subject to increasingly stringent limitations on such
distributions and payments as the buffer approaches zero. The new rule also generally prohibits a
banking organization from making such distributions or payments during any quarter if its eligible
retained income is negative and its capital conservation buffer ratio was 2.5% or less at the end of
the previous quarter. The eligible retained income of a banking organization is defined as its net
income for the four calendar quarters preceding the current calendar quarter, based on the
organization’s quarterly regulatory reports, net of any distributions and associated tax effects not
already reflected in net income.
Increases capital requirements for past-due loans, high volatility commercial real estate exposures
and certain short-term commitments and securitization exposures.
Expands the recognition of collateral and guarantors in determining risk-weighted assets.
Removes references to credit ratings consistent with the Dodd Frank Act and establishes due
diligence requirements for securitization exposures.
Various legislation affecting financial institutions and the financial industry will likely continue to be
introduced in Congress, and such legislation may further change banking statutes and the operating environment of
the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit
or expand permissible activities or affect the competitive balance depending upon whether any of this potential
legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the
financial condition or results of operations of the Company or any of its subsidiaries.
Also, such statutes, regulations and policies are continually under review by Congress and state legislatures
and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic
and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the
Company could have a material effect on the business of the Company.
Financial Holding Company Regulation
As a financial holding company, Farmers’ activities are subject to extensive regulation by the Federal Reserve
Board under the BHCA. Generally, in addition to the BHCA limits of banking, managing or controlling banks and
other activities that the Federal Reserve Board has determined to be closely related to banking, financial holding
company activities may include securities underwriting and dealing, insurance agency and underwriting activities
and merchant banking activities. Under Federal Reserve Board policy, a financial holding company is expected to
serve as a source of financial and managerial strength to each subsidiary and to commit resources to support those
subsidiaries. Under this policy, the Federal Reserve Board may require the company to contribute additional capital
to an undercapitalized subsidiary and may disapprove of the payment of dividends to the holding company’s
shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound
practice. The Dodd-Frank Act codified this policy as a statutory requirement.
The BHCA requires prior approval by the Federal Reserve Board for a bank holding company to directly or
indirectly acquire more than a 5.0% voting interest in any bank or its parent holding company. Factors taken into
consideration in making such a determination include the effect of the acquisition on competition, the public benefits
expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis and
the acquiring institution’s record of addressing the credit needs of the communities it serves.
The BHCA also governs interstate banking and restricts Farmers’ nonbanking activities to those determined
by the Federal Reserve Board to be financial in nature, or incidental or complementary to such financial activity,
without regard to territorial restrictions. Transactions among the Bank and its affiliates are also subject to certain
limitations and restrictions of the Federal Reserve Board, as described more fully under the caption “Dividends and
Transactions with Affiliates” in this Item 1.
5
The Gramm-Leach-Bliley Act of 1999 permits a qualifying bank holding company to elect to become a
financial holding company and thereby affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature and not otherwise permissible for a bank holding company. Farmers elected to
become a financial holding company during 2016.
Regulation of Nationally-Chartered Banks
As a national banking association, Farmers Bank is subject to regulation under the National Banking Act and
is periodically examined by the OCC. OCC regulations govern permissible activities, capital requirements, dividend
limitations, investments, loans and other matters. Furthermore, Farmers Bank is subject, as a member bank, to
certain rules and regulations of the Federal Reserve Board, many of which restrict activities and prescribe
documentation to protect consumers. Under the Bank Merger Act, the prior approval of the OCC is required for a
national bank to merge with, or purchase the assets or assume the deposits of, another bank. In reviewing
applications to approve merger and other acquisition transactions, the OCC and other bank regulatory authorities
may include among their considerations the competitive effect and public benefits of the transactions, the capital
position of the combined organization, the applicant’s performance under the CRA and fair housing laws, and the
effectiveness of the entities in restricting money laundering activities. In addition, the establishment of branches by
Farmers Bank is subject to the prior approval of the OCC. The OCC has the authority to impose sanctions on the
Bank and, under certain circumstances, may place Farmers Bank into receivership.
The Bank is also an insured institution as a member of the Deposit Insurance Fund. As a result, it is subject to
regulation and deposit insurance assessments by the FDIC.
Dividends and Transactions with Affiliates
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. The Company’s
principal source of funds to pay dividends on its common shares and service its debt is dividends from Farmers
Bank and its other subsidiaries. Various federal and state statutory provisions and regulations limit the amount of
dividends that Farmers Bank may pay to Farmers without regulatory approval. Farmers Bank generally may not,
without prior regulatory approval, pay a dividend in an amount greater than its undivided profits after deducting
statutory bad debt in excess of the Bank’s allowance for loan losses. In addition, prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared in a calendar year would exceed the total
of Farmers Bank’s net income for the year combined with its retained net income for the two preceding years.
In addition, Farmers and Farmers Bank are subject to other regulatory policies and requirements relating to the
payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The federal
banking agencies are authorized to determine under certain circumstances that the payment of dividends would be
an unsafe or unsound practice and to prohibit payment thereof. The federal banking agencies have stated that paying
dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice
and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in
the current financial and economic environment, the Federal Reserve Board has indicated that financial holding
companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum
allowable levels, unless both asset quality and capital are very strong. Thus, the ability of Farmers to pay dividends
in the future is currently influenced, and could be further influenced, by bank regulatory policies and capital
guidelines.
The Bank is subject to restrictions under federal law that limit the transfer of funds or other items of value to
the Company and its nonbanking subsidiaries and affiliates, whether in the form of loans and other extensions of
credit, investments and asset purchases or other transactions involving the transfer of value from a subsidiary to an
affiliate or for the benefit of an affiliate. These regulations limit the types and amounts of transactions (including
loans due and extensions of credit) that may take place and generally require those transactions to be on an arm’s-
length basis. In general, these regulations require that any “covered transaction” by Farmers Bank with an affiliate
must be secured by designated amounts of specified collateral and must be limited, as to any one of Farmers or its
non-bank subsidiaries, to 10% of Farmers Bank’s capital stock and surplus, and, as to Farmers and all such non-bank
subsidiaries in the aggregate, to 20% of Farmers Bank’s capital stock and surplus. The Dodd-Frank Act
significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking
6
organization including, for example, the requirement that the 10% capital limit on covered transactions apply to
financial subsidiaries. “Covered transactions” are defined by statute to include a loan or extension of credit, as well
as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal
Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the
acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.
Capital loans from the Company to the Bank are subordinate in right of payment to deposits and certain other
indebtedness of the Bank. In the event of Farmers’ bankruptcy, any commitment by Farmers to a federal bank
regulatory agency to maintain the capital of Farmers Bank will be assumed by the bankruptcy trustee and entitled to
a priority of payment.
The Federal Deposit Insurance Act of 1950, as amended, provides that, in the event of the “liquidation or other
resolution” of an insured depository institution such as the Bank, the insured and uninsured depositors, along with
the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the Company, with
respect to any extensions of credit they have made to such insured depository institution.
Capital Adequacy
Both Farmers and Farmers Bank are subject to risk-based capital requirements imposed by their respective
primary federal banking regulator. The Federal Reserve Bank monitors the capital adequacy of Farmers and the
FDIC monitors the capital adequacy of Farmers Bank. The revised risk-based capital requirements applicable to
bank holding companies and insured depository institutions, including the Company and the Bank, to make them
consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) became
effective for the Company and the Bank on January 1, 2015. The Basel III Rules require the maintenance of
minimum amounts and ratios of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets,
and of tier 1 capital to adjusted quarterly average assets.
Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of
treasury stock) and retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible
assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss
carryforwards, net of any valuation allowance, and certain other items as specified by the Basel III Rules.
Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the
Basel III Rules.
Basel III Rules allow for insured depository institutions to make a one-time election not to include most
elements of accumulated other comprehensive income in regulatory capital and instead effectively use the existing
treatment under the general risk-based capital rules. The Company and Bank made this opt-out election in the first
quarter of 2015 to avoid significant variations in the level of capital depending upon the impact of interest rate
fluctuations on the fair value of our investment securities portfolio.
The Basel III Rules also changed the risk-weights of assets in an effort to better reflect credit risk and other
risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate
acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that
are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused
portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250%
risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital;
and increased risk weights (from 0% to up to 600%) for equity exposures.
The Basel III Rules limit capital distributions and certain discretionary bonus payments if the banking
organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1
capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based
capital requirements. The capital conservation buffer began being phased in on January 1, 2016, at 0.625% of risk-
weighted assets, increasing each year by that amount until fully implemented at 2.5% on January 1, 2019. When
7
fully phased in on January 1, 2019, the Basel III Rules will require the Company and Bank to maintain (i) a
minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital
conservation buffer, which effectively results in a minimum ratio of 7.0% upon full implementation, (ii) a minimum
ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer, which
effectively results in a minimum ratio of 8.50% upon full implementation, (iii) a minimum ratio of total capital to
risk-weighted assets of at least 8.0%, plus a 2.5% capital conservation buffer, which effectively results in a
minimum ratio of 10.5% upon full implementation and (iv) a minimum leverage ratio of 4.0%.
Prior to January 1, 2015, federal regulatory agencies required the Company and Bank to maintain minimum
tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively, and tier 1 capital to average assets
(tier 1 leverage ratio) of at least 4.0%. In order to be considered well capitalized under the rules in effect prior to
January 1, 2015, the Company had to maintain tier 1 and total capital to risk-weighted assets of 6.0% and 10.0%,
respectively, and a leverage ratio of 5.0%. Tier 1 capital consisted of common equity, retained earnings, certain
types of preferred stock, qualifying minority interest and trust preferred securities, subject to limitations, and
excluded goodwill and various intangible assets.
When fully phased in on January 1, 2019, Basel III will require banks to maintain: (i) as a newly adopted
international standard, a minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5%, plus a
2.5% capital conservation buffer (the “CCB”) (which is added to the 4.5% CET1 ratio as that buffer is phased in,
which will effectively result in a minimum ratio of CET1 to risk-weighted assets of 7.0%); (ii) a minimum ratio of
Tier 1 capital to risk-weighted assets of 6.0%, plus the CCB (which is added to the 6.0% Tier 1 capital ratio as that
buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% on full implementation); (iii) a
minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the CCB (which is
added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio
of 10.5% upon full implementation); and (iv) as a newly adopted international standard, a minimum leverage ratio of
3.0%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures
(computed as the average for each quarter of the month-end ratios for the quarter).
The Basel III final framework provides for a number of new deductions from and adjustments to CET1,
including the deduction of mortgage servicing rights, deferred tax assets dependent upon future taxable income and
significant investments in non-consolidated financial entities if any one such category exceeds 10.0% of CET1 or if
all such categories in the aggregate exceed 15.0% of CET1.
The following is a summary of the other major changes from the current general risk-based capital rule:
•
•
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replacement of the external credit ratings approach to standards of creditworthiness with a
simplified supervisory formula approach;
stricter limitations on the extent to which mortgage servicing assets, deferred tax assets and
significant investments in unconsolidated financial institutions may be included in common equity
tier 1 capital and the risk weight to be assigned to any amounts of such assets not deducted; and
increased risk weights for past-due loans, certain commercial real estate loans and some equity
exposures, and selected other changes in risk weights and credit conversion factors.
Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is
considering further amendments to Basel III, including imposition of additional capital surcharges on globally
systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits
federal banking agencies to adopt regulations affecting capital requirements in a number of respects, including
potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the
regulations ultimately applicable to the Company may differ substantially from the currently published final Basel
III framework. Requirements of higher capital levels or higher levels of liquid assets could adversely impact the
Company’s net income and return on equity.
8
Volcker Rule
In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision
of the Dodd-Frank Act (the "Volcker Rule"). The Volcker Rule places limits on the trading activity of insured
depository institutions and entities affiliated with a depository institution, subject to certain exceptions. The trading
activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such
instrument in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule
exempts specified U.S. Government, agency and/or municipal obligations, and it exempts trading conducted in
certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a
fiduciary on behalf of customers, to satisfy a debt previously contracted, repurchase and securities lending
agreements and risk-mitigating hedging activities.
The Volcker Rule also prohibits a banking entity from having an ownership interest in, or certain relationships
with, a hedge fund or private equity fund, with a number of exceptions.
The Bank does not engage in any of the trading activities or own any of the types of funds prohibited by the
Volcker Rule.
Prompt Corrective Action
The federal banking agencies have established a system of prompt corrective action to resolve certain of the
problems of undercapitalized institutions. This system is based on five capital level categories for insured
depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” and “critically undercapitalized.”
The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a
bank’s capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90
days after it becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the
concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise
may be significantly affected depending on a bank’s capital category. For example, a bank that is not “well
capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must
guarantee, in part, specific aspects of the bank’s capital plan for the plan to be acceptable.
Federal law permits the OCC to order the pro rata assessment of shareholders of a national bank whose capital
stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank’s capital stock.
This statute also provides for the enforcement of any such pro rata assessment of shareholders of such national bank
to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock owned by any assessed
shareholder failing to pay the assessment. As the sole shareholder of Farmers Bank, the Company is subject to such
provisions.
Deposit Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund
of the FDIC, and Farmers Bank is assessed deposit insurance premiums to maintain the Deposit Insurance Fund.
The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith
and credit of the United States Government. Insurance premiums for each insured institution are determined based
upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal
regulator and other information deemed by the FDIC to be relevant to the risk posed to the Deposit Insurance Fund
by the institution. The assessment rate is then applied to the amount of the institution’s deposits to determine the
institution’s insurance premium.
The FDIC assesses a quarterly deposit insurance premiums on each insured institution based on risk
characteristics of the institution and may also impose special assessments in emergency situations. The premiums
fund the Deposit Insurance Fund ("DIF"). Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the
designated reserve ratio ("DRR"), which is the amount in the DIF as a percentage of all DIF insured deposits. In
9
March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30,
2010, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on
institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the
former statutory minimum of 1.15%. Although the FDIC's new rules reduced assessment rates on all banks, they
imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reaches 1.35%. The rules
also provide assessment credits to banks with assets of less than $1 billion for the portion of their assessments that
contribute to the increase of the DRR to 1.35%. The rules further changed the method of determining risk-based
assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on
greater risks pay more for deposit insurance than banks that take on less risk.
In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds
issued by the Financing Corporation, which was established by the government to recapitalize a predecessor to the
DIF. These assessments will continue until the Financing Corporation bonds mature in 2019.
As insurer, the FDIC is authorized to conduct examinations of and to require reporting by federally-insured
institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. The FDIC also has the
authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or written agreement entered into with the FDIC. The management of the Bank does not
know of any practice, condition or violation that might lead to termination of deposit insurance.
Fiscal and Monetary Policies
The Company’s business and earnings are affected significantly by the fiscal and monetary policies of the
federal government and its agencies. The Company is particularly affected by the policies of the Federal Reserve
Board, which regulates the supply of money and credit in the United States in order to influence general economic
conditions, primarily through open market operations in U.S. government securities, changes in the discount rate on
bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies
and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as well as
interest rates charged on loans and paid on deposits.
The monetary policies of the Federal Reserve board have had a significant effect on operations and results of
financial institutions in the past and are expected to have significant effects in the future. In view of the changing
conditions in the economy, the money markets and activities of monetary and fiscal authorities, Farmers can make
no predictions as to future changes in interest rates, credit availability or deposit levels.
Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent
with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit
needs of its market areas by, among other things, providing credit to low and moderate-income individuals and
communities. Depository institutions are periodically examined for compliance with the CRA and are assigned
ratings. In order for a bank holding company to commence any new activity permitted by the BHCA, or to acquire
any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of
the bank holding company must have received a rating of at least “satisfactory” in its most recent examination under
the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed
transaction. Farmers received a rating of “satisfactory” in its most recent CRA examination.
Customer Privacy
Farmers Bank is subject to regulations limiting the ability of financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies
to consumers and, in some circumstances, allow customers to prevent disclosure of certain personal information to a
nonaffiliated third party. These regulations affect how consumer information is transmitted and conveyed to outside
vendors.
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Anti-Money Laundering and the USA Patriot Act
The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) and its related regulations require insured depository
institutions, broker-dealers and certain other financial institutions to have policies, procedures and controls to detect,
prevent, and report money laundering and terrorist financing. The USA Patriot Act and its regulations also provide
for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions,
as well as among financial institutions, for counter-terrorism purposes. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the
relevant laws or regulations, could have serious legal and reputational consequences for the institution. In addition,
federal banking agencies are required, when reviewing bank holding company acquisition and bank merger
applications, to take into account the effectiveness of the anti-money laundering policies, procedures and controls of
the applicants.
Corporate Governance
The Sarbanes-Oxley Act of 2002 effected broad reforms to areas of corporate governance and financial
reporting for public companies under the jurisdiction of the Commission. The Company’s corporate governance
policies include an Audit Committee Charter, a Compensation Committee Charter, Corporate Governance and
Nominating Committee Charter and Code of Business Conduct and Ethics. The Board of Directors reviews the
Company’s corporate governance practices on a continuing basis. These and other corporate governance policies
have been provided previously to shareholders and are available, along with other information on Farmers’
corporate governance practices, on the Company’s website at www.farmersbankgroup.com.
As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s chief executive officer and chief
financial officer are each required to certify that the Company’s Quarterly and Annual Reports do not contain any
untrue statement of a material fact. The rules have several requirements, including having these officers certify that:
they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s
internal controls, they have made certain disclosures about the Company’s internal controls to its auditors and the
audit committee of the Board of Directors and they have included information in the Company’s Quarterly and
Annual Reports about their evaluation and whether there have been significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the evaluation.
Executive and Incentive Compensation
In June 2010, the Federal Reserve Board, OCC and FDIC issued joint interagency guidance on incentive
compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-
taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk
profile of an organization, either individually or as part of a group, is based upon the key principles that a banking
organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking
beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal
controls and risk management; and (iii) be supported by strong corporate governance, including active and effective
oversight by the organization’s board of directors.
Pursuant to the Joint Guidance, the Federal Reserve Board will review as part of a regular, risk-focused
examination process, the incentive compensation arrangements of financial institutions such as Farmers. Such
reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and
the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included
in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can
affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against
an institution if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness, and prompt and effective measures are not being
taken to correct the deficiencies.
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On February 7, 2011, the federal banking agencies initially issued jointly proposed rules on incentive-based
compensation arrangements under applicable provisions of the Dodd-Frank Act (the “First Proposed Rules”). The
First Proposed Rules generally apply to financial institutions with $1.0 billion or more in assets that maintain
incentive-based compensation arrangements for certain covered employees.
In May 2016, the federal bank regulatory agencies issued a second joint notice of proposed rules (the “Second
Proposed Joint Rules”) likewise designed to prohibit incentive-based compensation arrangements that encourage
inappropriate risks at financial institutions. The Second Proposed Joint Rules would also apply to covered financial
institutions with total assets of $1 billion or more, but the rules would differ for each of three categories of financial
institutions:
•
•
•
Level 1 – institutions with assets of $250 billion or more;
Level 2 – institutions with assets of at least $50 billion and less than $250 billion; and
Level 3 – institutions with assets of at least $1 billion and less than $50 billion.
Farmers would be a Level 3 institution. Some of the requirements would apply only to Level 1 and Level 2
institutions. For all covered institutions, including Level 3 institutions, the proposed rules would:
•
•
•
prohibit incentive-based compensation arrangements that are “excessive” or “could lead to
material financial loss;”
require incentive based compensation that is consistent with a balance of risk and reward,
effective management and control of risk, and effective governance; and
require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.
Public companies will also be required, once stock exchanges impose additional listing requirements under the
Dodd-Frank Act, to implement “clawback” procedures for incentive compensation payments and to disclose the
details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous
financial information necessitating a restatement due to material noncompliance with financial reporting
requirements. This clawback policy is intended to apply to compensation paid within a three year look-back
window of the restatement and would cover all executives who received incentive awards.
The Dodd-Frank Act also provides shareholders the opportunity to cast a non-binding vote on executive
compensation practices, imposes new executive compensation disclosure requirements, and contains additional
considerations of the independence of compensation advisors.
Future Legislation
Various and significant legislation affecting financial institutions and the financial industry is from time to
time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may
include proposals to expand or contract the powers of bank holding companies and depository institutions or
proposals to substantially change the financial institution regulatory system. Such legislation could change the
operating environment for Farmers and its subsidiaries in substantial and unpredictable ways, and could significantly
increase or decrease the costs of doing business, limit or expand permissible activities or affect the competitive
balance among financial institutions. With the enactment of the Dodd-Frank Act and the continuing implementation
of final rules and regulations thereunder, the nature and extent of future legislative and regulatory changes affecting
financial institutions remains very unpredictable. Farmers cannot predict the scope and timing of any such future
legislation and, if enacted, the effect that it could have on its business, financial condition or results of operations.
Summary
To the extent that the foregoing information describes statutory and regulatory provisions applicable to the
Company or its subsidiaries, it is qualified in its entirety by reference to the full text of those provisions or
agreements. Also, such statutes, regulations and policies are continually under review by the U.S. Congress and
state legislatures as well as federal and state regulatory agencies and are subject to change at any time, particularly
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in the current economic and regulatory environment. Any such change in applicable statutes, regulations or
regulatory policies could have a material effect on Farmers and its business, financial condition or results of
operations.
Item 1A. Risk Factors.
The following are certain risk factors that could materially and negatively affect our business, results of
operations, cash flows or financial condition. These risk factors should be considered in connection with evaluating
the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our
actual results or financial condition to differ materially from those projected in forward-looking statements. The
risks that are discussed below are not the only ones we face. If any of the following risks occur, our business,
financial condition or results of operations could be negatively affected. Additional risks that are not presently
known or that we presently deem to be immaterial could also have a material, adverse impact on our business,
financial condition or results of operations.
Risks Relating to Economic and Market Conditions
Changes in economic, political, and market conditions may adversely affect our industry and our business.
Our success depends in part on national and local economic, political, and market conditions as well as
governmental monetary and other financial policies. Conditions such as inflation, recession, unemployment,
changes in interest rates, money supply, governmental fiscal policies and other factors beyond our control may
adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. Because we have a
significant amount of real estate loans, additional decreases in real estate values could adversely affect the value of
property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy
may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which
would have an adverse impact on our earnings. If during a period of reduced real estate values we are required to
liquidate the collateral securing loans to satisfy the debt or to increase our allowance for loan losses, it could
materially reduce our profitability and adversely affect our financial condition. Moreover, the Financial Accounting
Standards Board may change its requirements for establishing the loan loss allowance. The majority of our loans are
to individuals and businesses in Northeast Ohio. Consequently, further significant declines in the economy in the
area could have a material adverse effect on our business, financial condition or results of operations. It is uncertain
when the negative credit trends in our market will reverse, and, therefore, future earnings are susceptible to further
declining credit conditions in the market in which we operate.
Changes in interest rates could adversely affect our income and financial condition.
Our earnings and cash flow are dependent upon our net interest income. Net interest income is the difference
between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser
extent, securities) and the interest expense generated by our interest-bearing liabilities (consisting primarily of
deposits and wholesale borrowings). Our level of net interest income is primarily a function of the average balance
of our interest-earning assets, the average balance of our interest-bearing liabilities and the spread between the yield
on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our
interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by external factors, such as the
local economy, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market
interest rates.
Interest rates are beyond our control, and they fluctuate in response to general economic conditions and the
policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in
monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of
investments, the generation of deposits and the rates received on loans and investment securities and paid on
deposits. While we have taken measures intended to manage the risks of operating in a changing interest rate
environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk. See
additional interest rate risk discussion under the Market Risk section found in Item 7A of this Annual Report on
Form 10-K.
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Defaults by another larger financial institution could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit,
trading, clearing or other relationships between institutions. As a result, concerns about, or a default or threatened
default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by
other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial
intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which we and
our subsidiaries interact on a daily basis, and therefore could adversely affect our business, financial condition or
results of operations.
Risks Related to Our Business
We extend credit to a variety of customers based on internally set standards and judgment. We manage
credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going
process of assessment of the quality of credit already extended. Our credit standards and on-going process of
credit assessment might not protect us from significant credit losses.
We take credit risk by virtue of making loans, extending loan commitments and letters of credit and, to a
lesser degree, purchasing non-governmental securities. Our exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize “in-market” lending, while avoiding highly leveraged transactions
as well as excessive industry and other concentrations. Our credit administration function employs risk management
techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. While these
procedures are designed to provide us with the information needed to implement policy adjustments where
necessary, and to take proactive corrective actions, there can be no assurance that such measures will be effective in
avoiding undue credit risk.
We have significant exposure to risks associated with commercial real estate and residential real estate in
our primary markets.
As of December 31, 2017, approximately 62.2% of our loan portfolio consisted of commercial real estate and
residential real estate loans, including real estate development, construction and residential and commercial
mortgage loans. Consequently, real estate-related credit risks are a significant concern for us. The adverse
consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic
developments that are not controllable or entirely foreseeable by us or our borrowers. General difficulties in our real
estate markets have recently contributed to increases in our non-performing loans, charge-offs and decreases in our
income.
Our business depends significantly on general economic conditions in Ohio. Accordingly, the ability of our
borrowers to repay their loans, and the value of the collateral securing such loans, may be significantly affected by
economic conditions in the regions we serve or by changes in the local real estate markets. A significant decline in
general economic conditions caused by inflation, recession, unemployment, acts of terrorism or other factors beyond
our control could have an adverse effect on our business, financial condition or results of operations.
Our indirect lending exposes us to increased credit risks.
A portion of our current lending involves the purchase of consumer automobile installment sales contracts
from automobile dealers located in Northeastern Ohio. These loans are for the purchase of new or late model used
cars. We serve customers over a broad range of creditworthiness, and the required terms and rates are reflective of
those risk profiles. While these loans have higher yields than many of our other loans, such loans involve significant
risks in addition to normal credit risk. Potential risk elements associated with indirect lending include the limited
personal contact with the borrower as a result of indirect lending through dealers, the absence of assured continued
employment of the borrower, the varying general creditworthiness of the borrower, changes in the local economy
and difficulty in monitoring collateral. While indirect automobile loans are secured, such loans are secured by
depreciating assets and characterized by loan to value ratios that could result in us not recovering the full value of an
outstanding loan upon default by the borrower. Delinquencies, charge-offs and repossessions of vehicles in this
portfolio are always concerns. If general economic conditions worsen, we may experience higher levels of
delinquencies, repossessions and charge-offs.
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Commercial and industrial loans may expose us to greater financial and credit risk than other loans.
As of December 31, 2017, approximately 13.9% of our loan portfolio consisted of commercial and industrial
loans. Commercial and industrial loans generally carry larger loan balances and can involve a greater degree of
financial and credit risk than other loans. Any significant failure to pay on time by our customers would hurt our
earnings and cause a significant increase in non-performing loans. The increased financial and credit risk associated
with these types of loans are a result of several factors, including the concentration of principal in a limited number
of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types of loans. In addition, when
underwriting a commercial or industrial loan, we may take a security interest in commercial real estate, and, in some
instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to
potential financial risks. An increase in non-performing loans could result in a net loss of earnings from these loans,
an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material
adverse effect on our business, financial condition or results of operations.
Our allowance for loan loss may not be adequate to cover actual future losses.
We maintain an allowance for loan losses to cover current, probable incurred loan losses. Every loan we
make carries a certain risk of non-repayment, and we make various assumptions and judgments about the
collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the
loan portfolio, management determines the amount of the allowance for loan losses by considering general market
conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers
relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, which may be beyond our control, and these
losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss
allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses
may not be sufficient to cover losses inherent in our loan portfolio, which will require additions to the allowance.
Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact
on our business, financial condition or results of operations.
We are subject to certain risks with respect to liquidity.
“Liquidity” refers to our ability to generate sufficient cash flows to support our operations and to fulfill our
obligations, including commitments to originate loans, to repay our wholesale borrowings and other liabilities and to
satisfy the withdrawal of deposits by our customers. Our primary source of liquidity is our core deposit base, which
is raised through our retail branch system. Core deposits – savings and money market accounts, time deposits less
than $250 thousand and demand deposits—comprised approximately 96.4% of total deposits at December 31, 2017.
Additional available unused wholesale sources of liquidity include advances from the FHLB, issuances through
dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further
provided by unencumbered, or unpledged, investment securities that totaled $123.7 million at December 31, 2017.
An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets
could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to
finance our activities could be impaired by factors that affect us specifically or the financial services industry in
general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our
business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also
be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news
and expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in
the domestic and worldwide credit markets.
Our business strategy includes continuing our growth plans. Our business, financial condition or results of
operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to continue pursuing a profitable growth strategy both within our existing markets and in new
markets. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by
companies in significant growth stages of development. We cannot assure that we will be able to expand our market
15
presence in our existing markets or successfully enter new markets or that any such expansion will not adversely
affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on
our business, future prospects, financial condition or results of operations and could adversely affect our ability to
successfully implement our business strategy. Also, if we grow more slowly than anticipated, our operating results
could be materially adversely affected.
We may experience difficulties in integrating acquired businesses, or acquisitions may not perform as
expected.
We completed the acquisition of Monitor in 2017 and Bowers in 2016. The successful integration of these
acquisitions depends on our ability to manage the operations and personnel of the acquired businesses. Integrating
operations is complex and requires significant efforts and expenses. Potential difficulties we may encounter as part
of the integration process include the following:
•
•
•
•
•
•
•
employees may voluntarily or involuntarily exit the Company because of the acquisitions;
our management team may have its attention diverted while trying to integrate the acquired
companies;
we may encounter obstacles when incorporating the acquired operations into our operations;
differences in business backgrounds, corporate cultures and management philosophies;
potential unknown liabilities and unforeseen increased expenses;
previously undetected operational or other issues; and
the acquired operations may not otherwise perform as expected or provide expected results.
Any of these factors could adversely affect each company’s ability to maintain relationships with customers,
suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or
could reduce each company’s earnings or otherwise adversely affect our business and financial results after the
acquisition.
We may fail to realize all of the anticipated benefits of acquisitions, which could reduce our anticipated
profitability.
We expect that our acquisitions will result in certain synergies, business opportunities and growth prospects,
although we may not fully realize these expectations. Our assumptions underlying estimates of expected cost
savings may be inaccurate or general industry and business conditions may deteriorate. In addition, our growth and
operating strategies for acquired businesses may be different from the strategies that the acquired companies pursued.
If these factors limit our ability to integrate or operate the acquired companies successfully or on a timely basis, our
expectations of future results of operations, including certain cost savings and synergies expected to result from
acquisitions, may not be met.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best
people in most activities in which we engage can be intense, and we may not be able to retain or hire the people we
want or need. In order to attract and retain qualified employees, we must compensate them at market levels. If we
are unable to continue to attract and retain qualified employees, or do so at rates necessary to maintain our
competitive position, our performance, including our competitive position, could suffer, and, in turn, adversely
affect our business, financial condition or results of operations.
16
Strong competition within our markets could reduce our ability to attract and retain business.
We encounter significant competition from banks, savings and loan associations, credit unions, mortgage
banks, and other financial service companies in our markets. Some of our competitors offer a broader range of
products and services than we can offer as a result of their size and ability to achieve economies of scale. Such
competition includes major financial companies whose greater resources may afford them a marketplace advantage
by enabling them to maintain more numerous banking locations and support extensive promotional and advertising
campaigns. Our ability to maintain our history of strong financial performance and return on investment to
shareholders will depend in part on our continued ability to compete successfully in our market. Our financial
performance and return on investment to shareholders also depends on our ability to expand the scope of available
financial services to our customers. In addition to other banks, competitors include securities dealers, brokers,
investment advisors and finance and insurance companies. The increasingly competitive environment is, in part, a
result of changes in regulation, changes in technology and product delivery systems and the accelerating pace of
consolidation among financial service providers.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to utilize alternative methods to complete financial
transactions that historically have involved banks. For example, consumers can now maintain funds in brokerage
accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of
eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits
and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits
as a source of funds could have a material adverse effect on our business, financial condition or results of operations.
We are exposed to operational risk.
Similar to any large organization, we are exposed to many types of operational risk, including reputational
risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by
employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled
computer or telecommunications systems.
Negative public opinion can result from our actual or alleged conduct in any number of activities, including
lending practices, corporate governance and acquisitions and from actions taken by government regulators and
community organizations in response to those activities. Negative public opinion can adversely affect our ability to
attract and keep customers, and can expose us to litigation and regulatory action.
Given the volume of transactions we process, certain errors may be repeated or compounded before they are
discovered and successfully rectified. Our necessary dependence upon automated systems to record and process our
transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation
of those systems will result in losses that are difficult to detect. We may also be subject to disruptions of our
operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses
or electrical or telecommunications outages), which may give rise to disruption of service to customers and to
financial loss of liability. We are further exposed to the risk that our external vendors may be unable to fulfill their
contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective
employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove
to be inadequate.
Unauthorized disclosure of sensitive or confidential customer information, whether through a data breach
of our computer systems by cyber-attack or otherwise, could severely harm our business.
As part of our financial institution business, we collect, process and retain sensitive and confidential client and
customer information on behalf of our subsidiaries and other third parties. Despite the security measures we have in
place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security
breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other
similar events. If information security is breached, information could be lost or misappropriated, resulting in
17
financial loss or costs to us or damages to others. Any security breach involving the misappropriation, loss or other
unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely
damage our reputation, expose us to the risks of litigation and liability, or disrupt our operations, and have a material
adverse effect on our business, financial condition or results of operations. We have not experienced any material
loss relating to a cyber-attack or other information security breach, but there can be no assurance that we will not
suffer such attacks or attempted breaches, or incur resulting losses, in the future. Our risks with respect to these
threats remains heightened due to the evolving sophistication and frequency of such threats. As cyber-attacks and
other attempted information security threats continue to evolve, we may be required to spend significant additional
resources in efforts to modify and enhance our protective measures or in investigating or remediating of security
breaches or vulnerabilities.
We depend on our subsidiaries for dividends, distributions and other payments.
As a financial holding company, we are a legal entity separate and distinct from our subsidiaries. Our
principal source of funds to pay dividends on our common shares is dividends from these subsidiaries. Federal and
state statutory provisions and regulations limit the amount of dividends that our banking and other subsidiaries may
pay to us without regulatory approval. In the event our subsidiaries become unable to pay dividends to us, we may
not be able to pay dividends on our outstanding common shares. Accordingly, our inability to receive dividends
from our subsidiaries could also have a material adverse effect on our business, financial condition and results of
operations. Further discussion of our ability to pay dividends can be found under the caption “Dividends and
Transactions with Affiliates” in Item 1 of this Annual Report on Form 10-K.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available
when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our
operations. Federal banking agencies have proposed extensive changes to their capital requirements, including
raising required amounts and eliminating the inclusion of certain instruments from the calculation of capital. The
final form of such regulations and their impact on the Company is unknown at this time, but may require us to raise
additional capital. In addition, we may elect to raise capital to support our business or to finance acquisitions, if any,
or for other anticipated reasons. Our ability to raise additional capital, if needed, will depend on financial
performance, conditions in the capital markets, economic conditions and a number of other factors, including the
satisfaction or release of preemptive rights in the event of a common share offering, many of which are outside our
control. Therefore, there can be no assurance additional capital can be raised when needed or that capital can be
raised on acceptable terms. Impairment to our ability to raise capital may have a material adverse effect on our
business, financial condition or results of operations.
Risks Related to the Legal and Regulatory Environment
Increases in FDIC insurance premiums may have a material adverse effect on our earnings.
The FDIC maintains the Deposit Insurance Fund to resolve the cost of bank failures. Since late 2008, the FDIC
has taken various actions intended to maintain a strong funding position and restore reserve ratios of the Deposit
Insurance Fund. Those actions included increasing assessment rates for all insured institutions, requiring riskier
institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and
unsecured debt levels, and imposing special assessments. In addition, in 2011 the FDIC approved a final rule that
changed the deposit insurance assessment base and assessment rate schedule, adopted a new large-bank pricing
assessment scheme and set a target size for the Deposit Insurance Fund. The rule, as mandated by the Dodd-Frank
Act, finalized a target size for the Deposit Insurance Fund at 2 percent of insured deposits. The FDIC recently
adopted rules revising assessments in a manner that benefits banks with assets of less than $10 billion, although
there can be no assurance that such assessments will not change in the future.
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We have a limited ability to control the amount of premiums we are required to pay for FDIC insurance. If
there are additional financial institution failures or other significant legislative or regulatory changes, the FDIC may
be required to increase assessment rates or take actions similar to those taken after 2008. Increases in FDIC
insurance assessment rates may materially adversely affect our results of operations and our ability to continue to
pay dividends on our common shares at the current rate or at all.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the
businesses in which we are engaged.
The financial services industry is extensively regulated. We are subject to extensive state and federal
regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may
change from time to time and are primarily intended for the protection of consumers, depositors and the Deposit
Insurance Fund, and not to benefit our shareholders. The impact of any changes to laws and regulations or other
actions by regulatory agencies may negatively impact us or our ability to increase the value of our business.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including the imposition of restrictions on the operation of an institution, the classification of assets by an institution
and the adequacy of an institution’s allowance for loan losses. Additionally, actions by regulatory agencies or
significant litigation against us could cause us to devote significant time and resources to defending our business and
may lead to penalties that materially affect us and our shareholders.
In addition to laws, regulations and actions directed at the operations of banks, proposals to reform the
housing finance market consider winding down Fannie Mae and Freddie Mac, which could negatively affect our
sales of loans.
Even a reduction in regulatory restrictions could adversely affect our operations and our shareholders if less
restrictive regulation increases competition within the industry generally or within our markets.
Our results of operations, financial condition or liquidity may be adversely impacted by issues arising in
foreclosure practices, including delays in the foreclosure process, related to certain industry deficiencies, as well
as potential losses in connection with actual or projected repurchases and indemnification payments related to
mortgages sold into the secondary market.
Previous announcements of deficiencies in foreclosure documentation by several large seller/servicer financial
institutions have raised various concerns relating to mortgage foreclosure practices. The integrity of the foreclosure
process is important to our business, as an originator and servicer of residential mortgages. As a result of our
continued focus of concentrating our lending efforts in our primary markets in Ohio, as well as servicing loans for
the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), we do not anticipate suspending any of our foreclosure activities. We previously reviewed our
foreclosure procedures and concluded they are generally conservative in nature and do not present the significant
documentation deficiencies underlying other industry foreclosure problems. Nevertheless, we could face delays and
challenges in the foreclosure process arising from claims relating to industry practices generally, which could
adversely affect recoveries and our financial results, whether through increased expenses of litigation and property
maintenance, deteriorating values of underlying mortgaged properties or unsuccessful litigation results generally.
In addition, in connection with the origination and sale of residential mortgages into the secondary market, we
make certain representations and warranties, which, if breached, may require us to repurchase such loans, substitute
other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. Although
we believe that our mortgage documentation and procedures have been appropriate and are generally conservative in
nature, it is possible that we will receive repurchase requests in the future and we may not be able to reach favorable
settlements with respect to such requests. It is therefore possible that we may increase our reserves or may sustain
losses associated with such loan repurchases and indemnification payments.
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Environmental liability associated with commercial lending could have a material adverse effect on our
business, financial condition or results of operations.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business,
we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or
toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable
for remediation costs, as well as for personal injury and property damage. In addition, we own and operate certain
properties that may be subject to similar environmental liability risks.
Environmental laws may require us to incur substantial expenses and may materially reduce the affected
property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures requiring the performance of an environmental site assessment
before initiating any foreclosure action on real property, these assessments may not be sufficient to detect all
potential environmental hazards. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our business, financial condition or results of
operations.
Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require
charges to earnings, which could result in a negative impact on our results of operations.
In assessing the impairment of investment securities, we consider the length of time and extent to which the fair
value has been less than cost, the financial condition and near-term prospects of the issuers, whether the market decline
was affected by macroeconomic conditions and whether we have the intent to sell the debt security or will be required
to sell the debt security before its anticipated recovery. Under current accounting standards, goodwill and certain other
intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically
or when impairment indicators are present. Assessment of goodwill and such other intangible assets could result in
circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such
circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period. Deferred tax
assets are only recognized to the extent it is more likely than not they will be realized. Should management determine
it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a change to
earnings would be reflected in the period. This was realized as a result of the enactment on December 22, 2017, of
H.R.1, known as the “Tax Cuts and Jobs Act” which, among other things, reduced the corporate income tax rate to
21% effective January 1, 2018. As a result of passage of the new tax law, Farmers completed a revaluation of its net
deferred tax assets. The Company’s deferred tax assets, net of deferred tax liabilities, represent corporate tax
benefits anticipated to be realized in the future. The reduction in the federal corporate tax rate, effective January 1,
2018, reduces these benefits. Farmers determined that its net deferred tax assets would be reduced by approximately
$1.8 million in the fourth quarter of 2017, representing an impact on earnings per share of approximately $0.06 per
diluted share based fourth quarter weighted average diluted shares outstanding of approximately 27.5 million.
Changes and uncertainty in tax laws, including the recently enacted Tax Cuts and Jobs Act, could
adversely affect our performance.
We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll,
financial institutions tax, withholding and ad valorem taxes. Changes to our taxes could have a material adverse
effect on our results of operations and, as described in the above risk discussion and below, the fair value of net
deferred tax assets. In addition, our customers are subject to a wide variety of federal, state and local taxes.
Changes in taxes paid by our customers may adversely affect their ability to purchase homes or consumer products,
which could adversely affect their demand for our loans and deposit products. In addition, such negative effects on
our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed
securities in which we have invested.
20
The Tax Cuts and Jobs Act, among other changes, imposes additional limitations on the federal income tax
deductions individual taxpayers may take for mortgage loan interest payments and for payments of state and local
taxes, including real property taxes. The Tax Cuts and Jobs Act also imposes additional limitations on the
deductibility of business interest expense and eliminates other deductions in their entirety, including deductions for
certain home equity loan interest payments. Such limits and eliminations may result in customer defaults on loans
we have made and decrease the value of mortgage-backed securities in which we have invested.
Anti-takeover provisions could delay or prevent an acquisition or change in control by a third party.
Provisions of the Ohio General Corporation Law, our Amended Articles of Incorporation, and our Amended
Code of Regulations, including a staggered board and supermajority voting requirements, could make it more
difficult for a third party to acquire control of us or could have the effect of discouraging a third party from
attempting to acquire control of us.
We may be a defendant from time to time in the future in a variety of litigation and other actions, which
could have a material adverse effect on our business, financial condition or results of operations.
We and our subsidiaries may be involved from time to time in the future in a variety of litigation arising out of
our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted
against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or
settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our
business, financial condition or results of operations. In addition, we may not be able to obtain appropriate types or
levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms,
if at all.
Item 1B. Unresolved Staff Comments.
There are no matters of unresolved staff comments from the Commission staff.
Item 2. Properties.
Farmers National Banc Corp.’s Properties
The Company does not own any property. The Company’s operations are conducted at Farmers Bank’s main
office, which is located at 20 and 30 South Broad Street, Canfield, Ohio.
21
Farmers National Bank Property
The Bank’s main office is located at 20 and 30 S. Broad Street, Canfield, Ohio. The other locations of
Farmers Bank are:
Office Building ......................... 40 & 46 S. Broad St., Canfield, Ohio
Austintown Office .................... 22 N. Niles-Canfield Rd., Youngstown, Ohio
Lake Milton Office ................... 17817 Mahoning Avenue, Lake Milton, Ohio
Cornersburg Office ................... 3619 S. Meridian Rd., Youngstown, Ohio
Colonial Plaza Office................ 401 E. Main St. Canfield, Ohio
Western Reserve Office............ 102 W. Western Reserve Rd., Youngstown, Ohio
Salem Office ............................. 2424 East State Street, Salem, Ohio
Columbiana Office.................... 340 State Rt. 14, Columbiana, Ohio
Damascus Office....................... 29053 State Rt. 62 Damascus, Ohio
Poland Office ............................ 106 McKinley Way West, Poland, Ohio
Niles Office............................... 1 South Main Street, Niles, Ohio
Niles Drive Up.......................... 170 East State Street, Niles, Ohio
Girard Office............................. 121 North State Street, Girard, Ohio
Eastwood Office ....................... 5845 Youngstown-Warren Rd, Niles, Ohio
Niles Operation Center ............. 51 South Main Street, Niles, Ohio
Canton Office............................ 4518 Fulton Dr., Canton, Ohio
McClurg Road Office ............... 42 McClurg Rd., Boardman, Ohio
Howland Office ........................ 1625 Niles-Cortland Rd., Warren, Ohio
Fairlawn Office......................... 2820 W. Market St., Suite 120, Akron, Ohio
Wealth Management Bldg. ....... 2 S. Broad Street, Canfield, Ohio
Alliance Office.......................... 310 West State St., Alliance, Ohio
Midway Office.......................... 7227 East Lincoln Way, Apple Creek, Ohio
Dalton Office ............................ 12 West Main St., Dalton, Ohio
Calcutta Office.......................... 15703 State Rt. 170, Calcutta, Ohio
East Liverpool Office ............... 617 Bradshaw Ave., East Liverpool, Ohio
Kidron Office............................ 4950 Kidron Rd., Kidron, Ohio
Lisbon Office ............................ 131 East Lincoln Way, Lisbon, Ohio
Lodi Office................................ 106 Ainsworth, Lodi, Ohio
Massillon Office ....................... 211 Lincoln Way East, Massillon, Ohio
Mayflower Office ..................... 2312 Lincoln Way NW, Massillon, Ohio
Mount Eaton Office .................. 15974 East Main St., Mount Eaton, Ohio
Orrville Main Office ................. 112 W. Market St., Orrville, Ohio
West High Street Office............ 1320 W. High St., Orrville, Ohio
Seville Office ............................ 4885 Atlantic Dr., Seville, Ohio
Smithville Office ...................... 153 East Main St., Smithville, Ohio
Burbank Road Office................ 4192 Burbank Rd., Wooster, Ohio
Downtown Wooster Office....... 305 West Liberty Street, Wooster, Ohio
Midland Office.......................... 629 Midland Ave., Midland, Pennsylvania
Beachwood Lending Office ..... 27600 Chagrin Blvd., Suite 300, Woodmere, Ohio
Big Prairie Office...................... 13210 State Route 226, Big Prairie, Ohio
Beaver Lending Office ............. 501 3rd Street, Beaver, Pennsylvania
22
The Bank owns all locations except the Colonial Plaza, Canton, Alliance, East Liverpool, Fairlawn,
Downtown Wooster, Beaver lending office and the Beachwood lending office, which are leased.
Farmers Trust Company Property
Farmers Trust Company operates from four locations owned and leased by the Bank:
Boardman Office................... 42 McClurg Rd., Boardman, Ohio
Howland Office..................... 1625 Niles-Cortland Rd., Warren, Ohio
Canton Office ........................ 4518 Fulton Dr. NW, Canton, Ohio
Downtown Wooster Office ... 305 West Liberty St., Wooster, Ohio
The bank owns the Boardman and Howland offices and leases space to the Trust Company. The Canton and
Wooster locations are leased from third parties.
Farmers National Insurance, LLC Property
Farmers National Insurance operates from two locations which are owned by the Bank:
Wealth Management
Building ............................. 2 S. Broad Street, Canfield, Ohio
Bowers Group Building.......... 339 North High Street, Cortland, Ohio
National Associates, Inc. Property
National Associates, Inc. operates from one location which is leased:
Fairview Park......................... 22720 Fairview Center Dr., Suite 100, Fairview
Park, Ohio
Item 3. Legal Proceedings.
In the normal course of business, the Company and its subsidiaries are at times subject to pending and
threatened legal actions, some for which the relief or damages sought are substantial. Although Farmers is not able
to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management
believes that, based on the information currently available, the outcome of such actions, individually or in the
aggregate, would not have a material adverse effect on the results of operations or stockholders’ equity of the
Company. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to
the results of operations in a particular future period as the time and amount of any resolution of such actions and its
relationship to the future results of operations are not known.
Item 4. Mine Safety Disclosures
Not applicable.
23
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of
Equity Securities
Market Information regarding the Company’s Common Shares.
Farmers’ common shares currently trade under the symbol “FMNB” on the Nasdaq Capital Market. Farmers
had 27,554,207 common shares outstanding and approximately 3,451 holders of record of common shares at March
1, 2018. The following table sets forth price ranges and dividend information for Farmers’ common shares for the
calendar quarters indicated. Quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent actual transactions. Certain limitations and restrictions on the ability of Farmers
to continue to pay quarterly dividends are described under the caption “Capital Resources” in Item 7 of this Part II,
and under the caption “Dividends and Transactions with Affiliates” in Item 1 of Part I.
Quarter Ended
High........................................................................ $
Low......................................................................... $
Cash dividends paid per share ................................ $
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
14.90 $
12.13 $
0.05 $
15.25 $
12.65 $
0.05 $
15.65 $
12.90 $
0.06 $
15.95
13.35
0.06
Quarter Ended
High........................................................................ $
Low......................................................................... $
Cash dividends paid per share ................................ $
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
9.03 $
8.00 $
0.04 $
9.68 $
8.54 $
0.04 $
11.82 $
8.66 $
0.04 $
15.50
9.98
0.04
Purchases of Common Shares by Farmers.
In September 2012, the Company announced that its Board of Directors approved a share repurchase program
under which the Company was authorized to repurchase up to 920,000 shares of its common stock in the open
market or in privately negotiated transactions, subject to market and other conditions (the “Program”). The Program
may be modified, suspended or terminated by the Company at any time. There were no shares repurchased during
the course of 2017. 19,900 shares of its common stock were repurchased by the Company in 2016 and 26,800
shares in 2015.
24
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(Table Dollar Amounts in Thousands except Per Share Data)
For the Years Ending December 31,
Summary of Earnings
Total Interest and Dividend Income
(including fees on loans) ......................... $
Total Interest Expense ................................
Net Interest Income ....................................
Provision for Loan Losses ..........................
Noninterest Income (1)...............................
Noninterest Expense...................................
Income Before Income Taxes.....................
Income Taxes .............................................
NET INCOME ........................................... $
Per Share Data
Basic Earnings Per Share ........................... $
Diluted Earnings Per Share ........................
Cash Dividends Paid ..................................
Book Value at Year-End ............................
Tangible Book Value (2) ............................
Balances at Year-End
2017
2016
2015
2014
2013
$
$
$
80,527
6,881
73,646
3,350
24,051
61,567
32,780
10,069
22,711
0.82
0.82
0.22
8.79
7.14
$
$
$
72,498
4,378
68,120
3,870
23,244
59,452
28,042
7,485
20,557
0.76
0.76
0.16
7.88
6.21
$
$
$
53,827
4,090
49,737
3,510
18,306
53,979
10,554
2,499
8,055
0.36
0.36
0.12
7.35
5.76
$
$
$
40,915
4,579
36,336
1,880
15,303
38,162
11,597
2,632
8,965
0.48
0.48
0.12
6.71
6.23
40,959
5,063
35,896
1,290
13,914
39,057
9,463
1,683
7,780
0.41
0.41
0.12
6.02
5.47
Total Assets ................................................ $2,159,069
Earning Assets ............................................ 1,998,245
Total Deposits............................................. 1,604,719
289,565
Short-Term Borrowings .............................
6,994
Long-Term Borrowings..............................
Loans Held for Sale ....................................
272
Net Loans ................................................... 1,565,066
242,074
Total Stockholders' Equity .........................
$1,966,113
1,819,455
1,524,756
198,460
15,036
355
1,416,783
213,216
$1,869,902
1,735,843
1,409,047
225,832
22,153
1,769
1,287,887
198,047
$1,136,967
1,074,434
915,703
59,136
28,381
511
656,220
123,560
$1,137,326
1,076,073
915,216
81,617
19,822
158
623,116
113,007
Average Balances
Total Assets ................................................ $2,082,447
228,963
Total Stockholders' Equity .........................
$1,924,914
211,408
$1,482,527
162,086
$1,141,047
120,352
$1,141,770
116,735
Significant Ratios
Return on Average Assets (ROA) ..............
Return on Average Equity (ROE) ..............
Average Earning Assets/Average Assets ...
Average Equity/Average Assets.................
Loans/Deposits ...........................................
Allowance for Loan Losses/Total Loans....
Allowance for Loan
Losses/Nonperforming Loans .................
Efficiency Ratio (On tax equivalent
basis)........................................................
Net Interest Margin ....................................
Dividend Payout Rate.................................
Tangible Common Equity Ratio (3) ...........
1.09%
9.92
92.35
10.99
98.30
0.78
1.07%
9.72
91.49
10.98
93.63
0.76
0.54%
4.97
91.91
10.93
92.04
0.69
0.79%
7.45
93.02
10.55
72.50
1.15
0.68%
6.66
92.90
10.22
68.91
1.20
160.04
132.83
85.96
89.99
83.25
59.66
3.99
26.47
9.31
61.59
4.01
21.03
8.75
75.26
3.81
33.32
8.50
70.24
3.59
24.95
10.17
74.82
3.58
28.89
9.11
(1) Noninterest income includes a securities impairment charge of $3 thousand for the year ended December 31,
2013
25
(2)
(3)
Tangible book value per share is Total Stockholders’ Equity minus goodwill and other intangible assets
divided by the number of shares outstanding.
The tangible common equity ratio is calculated by dividing total common stockholders’ equity by total assets,
after reducing both amounts by intangible assets. The tangible common equity ratio is not required by U.S.
GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the
adequacy of our capital levels. Since there is no authoritative requirement to calculate the tangible common
equity ratio, our tangible common equity ratio is not necessarily comparable to similar capital measures disclosed
or used by other companies in the financial services industry. Tangible common equity and tangible assets are
non U.S. GAAP financial measures and should be considered in addition to, not as a substitute for or superior to,
financial measures determined in accordance with U.S. GAAP. With respect to the calculation of the actual
unaudited tangible common equity ratio as of December 31, 2017, reconciliations of tangible common equity to
U.S. GAAP total common stockholders’ equity and tangible assets to U.S. GAAP total assets are set forth below:
Reconciliation of Common Stockholders’ Equity to Tangible Common Equity
December 31,
2013
Stockholders' Equity ................................................. $ 242,074 $ 213,216 $ 198,047 $ 123,560 $ 113,007
Less Goodwill and other intangibles.........................
10,343
Tangible Common Equity ......................................... $ 196,705 $ 168,062 $ 155,136 $ 114,747 $ 102,664
42,911
45,154
45,369
8,813
2015
2016
2014
2017
Reconciliation of Total Assets to Tangible Assets
December 31,
2013
Total Assets .............................................................. $2,159,069 $1,966,113 $1,869,902 $1,136,967 $1,137,326
10,343
Less Goodwill and other intangibles ........................
Tangible Assets ........................................................ $2,113,700 $1,920,959 $1,826,991 $1,128,154 $1,126,983
42,911
45,369
45,154
8,813
2015
2014
2017
2016
Acquisitions have occurred during the five year periods represented above that makes comparability difficult. The
current year impact of enacted federal tax reform makes comparability difficult too. See Note 2 – Business
Combinations and Note 16 – Income Taxes for additional details.
Reconciliation of Net Income, Excluding Merger Related Expenses and Deferred Tax Asset Adjustment
2017
December 31,
Net income ................................................................ $ 22,711 $ 20,557 $
412
Acquisition related costs - tax equated .....................
0
Deferred tax asset adjustment ...................................
20,969
Net income - adjusted ...............................................
Average shares outstanding ......................................
27,000
EPS excluding acquisition costs and deferred tax
asset adjustment ..................................................... $
283
1,793
24,787
27,568
0.78 $
0.90 $
2016
2015
8,055 $
4,831
0
12,886
22,678
2014
8,965 $
0
0
8,965
18,675
2013
7,780
214
0
7,994
18,773
0.57 $
0.48 $
0.43
Reconciliation of Return on Average Assets and Average Equity, Excluding Merger Related Expenses and Deferred
Tax Asset Adjustment
December 31,
ROA excluding merger related expenses (5)............
ROE excluding merger related expenses (6) ............
2017
1.19%
10.83%
2016
1.09%
9.92%
2015
0.87%
7.95%
2014
0.79%
7.45%
2013
0.71%
6.93%
(5) Net income - adjusted divided by average assets
(6) Net income - adjusted divided by average equity
26
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28
RATE AND VOLUME ANALYSIS
(Table Dollar Amounts in Thousands except Per Share Data)
The following table analyzes by rate and volume the dollar amount of changes in the components of the interest
differential:
2017 change from 2016
Change
Due
Change
Due
2016 change from 2015
Change
Due
Change
Due
Net
Change To Volume To Rate Change To Volume To Rate
Net
Tax Equivalent Interest Income
Loans........................................................... $ 6,816 $
(159)
Taxable securities .......................................
1,712
Tax-exempt securities .................................
22
Equity securities..........................................
228
Funds sold and other cash...........................
Total interest income ........................................ $ 8,619 $
7,078 $
(557)
1,485
36
16
8,058 $
(262) $ 18,515 $
(845)
398
1,071
227
228
(14)
212
137
561 $ 19,106 $
18,415 $
(838)
1,241
134
30
18,982 $
Interest Expense
Time deposits.............................................. $
Savings deposits..........................................
Demand deposits.........................................
Short term borrowings ................................
Long term borrowings ................................
730 $
43
496
1,478
(244)
Total interest expense....................................... $ 2,503 $
(20) $
(25)
150
193
(239)
750 $
68
346
1,285
(5)
59 $ 2,444 $
(776) $
151
356
512
44
287 $
206 $
83
180
170
(182)
457 $
100
(7)
(170)
94
107
124
(982)
68
176
342
226
(170)
Increase (decrease) in tax equivalent net
interest income .............................................. $ 6,116 $
7,999 $ (1,883) $ 18,819 $
18,525 $
294
The amount of change not solely due to rate or volume changes was allocated between the change due to rate and
the change due to volume based on the relative size of the rate and volume changes.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following presents a discussion and analysis of Farmers’ financial condition and results of operations by
its management. The review highlights the principal factors affecting earnings and the significant changes in balance
sheet items for the years 2017, 2016 and 2015. Financial information for prior years is presented when appropriate.
The objective of this financial review is to enhance the reader’s understanding of the accompanying tables and
charts, the consolidated financial statements, notes to financial statements and financial statistics appearing
elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s
insights of known events and trends that have or may reasonably be expected to have a material effect on Farmers’
business, financial condition or results of operations.
Cautionary Note Regarding Forward Looking Statements
Discussions in this Annual Report on Form 10-K that are not statements of historical fact (including
statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,”
“project,” intend,” and “plan”) are forward-looking statements that involve risks and uncertainties. Any forward-
looking statement is not a guarantee of future performance, and actual future results could differ materially from
those contained in forward-looking information. Factors that could cause or contribute to such differences include,
without limitation, risks and uncertainties detailed from time to time in Farmers’ filings with the Securities and
Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors” of this
Annual Report on Form 10-K.
Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to
put undue reliance on those forward-looking statements. The following list, which is not intended to be an all-
encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the
Company’s actual results to differ materially from those anticipated or expected in these forward-looking
statements:
•
•
•
•
•
•
•
•
•
general economic conditions in market areas where Farmers conducts business, which could
materially impact credit quality trends;
business conditions in the banking industry;
the regulatory environment;
fluctuations in interest rates;
demand for loans in the market areas where Farmers conducts business;
rapidly changing technology and evolving banking industry standards;
competitive factors, including increased competition with regional and national financial
institutions;
new service and product offerings by competitors and price pressures; and
other similar items.
Other factors not currently anticipated may also materially and adversely affect Farmers’ business, financial
condition, results of operations or cash flows. There can be no assurance that future results will meet expectations.
While the Company believes that the forward-looking statements in this Annual Report on Form 10-K are
reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these
statements speak only as of the date made. Farmers does not undertake, and expressly disclaims, any obligation to
update or alter any statements whether as a result of new information, future events or otherwise, except as may be
required by applicable law.
30
Results of Operations
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016.
The Company’s net income totaled $22.7 million during 2017, compared to $20.6 million for 2016. On a per share
basis, diluted earnings per share were $0.82 as compared to $0.76 diluted earnings per share for 2016. Return on
average assets and return on average equity were 1.09% and 9.92%, respectively, for the year ending December 31,
2017, compared to 1.07% and 9.72% for 2016. Excluding a $1.8 million adjustment of the net deferred tax asset
resulting from the Tax Cuts and Jobs Act that became law in December 2017 and $524 thousand in expenses related
to acquisition activities, net income for 2017 would have been $24.8 million or $0.90 per diluted share, and the
return on average assets and return on average equity would have been 1.19% and 10.83%, while the return on
average tangible equity would have been 13.48%.
On December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. H.R.1, among
other things, reduces the corporate income tax rate to 21%, effective January 1, 2018. As a result of passage of the
new tax law, Farmers completed a revaluation of its net deferred tax assets. The Company’s deferred tax assets, net
of deferred tax liabilities, represent corporate tax benefits anticipated to be realized in the future. The reduction in
the federal corporate tax rate, effective January 1, 2018, reduces these benefits. Farmers determined that its net
deferred tax assets would be reduced by approximately $1.8 million in the fourth quarter of 2017, representing an
impact on earnings per share of approximately $0.06 per diluted share based fourth quarter weighted average diluted
shares outstanding of approximately 27.5 million.
On August 15, 2017, the Company completed the acquisition of Monitor Bancorp, Inc. (“Monitor”), the
holding company for Monitor Bank. The transaction involved both cash and 465,787 shares of stock totaling $7.5
million. Pursuant to the terms of the merger agreement, common shareholders of Monitor were entitled to elect to
receive consideration in cash or in common shares, without par value, of the Farmers National Banc Corp., subject
to an overall limitation of 85% of the Monitor common shares being exchanged for Farmers common shares and 15%
exchanged for cash. The per share cash consideration of $769.38 is equal to Monitor’s March 31 tangible book
value multiplied by 1.25. Based on the volume weighted average closing price of Farmers common shares for the
20 trading days ended August 11, 2017 of $14.04, the final stock exchange ratio was 54.80, resulting in an implied
value per Monitor common share of $769.38.
On June 1, 2016, the Bank completed the acquisition of Bowers Insurance Agency, Inc. (Bowers), and merged
Bowers with Insurance, the Bank’s wholly-owned insurance agency subsidiary. Bowers will continue to operate out
of its Cortland, Ohio location and will enhance the Company’s current product lineup, and offer broader options of
commercial, farm, home, and auto property/casualty insurance carriers to meet all the needs of all the Company’s
customers. The transaction involved both cash and 123,280 shares of stock totaling $3.2 million, including up to
$1.2 million of future payments, contingent upon Bowers meeting performance targets. Goodwill of $1.8 million,
which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost
savings resulting from the combining of the companies. The goodwill was determined not to be deductible for
income tax purposes. The fair value of other intangible assets of $1.6 million is related to client relationships,
company name and noncompetition agreements.
Net Interest Income
Net interest income, the principal source of the Company’s earnings, represents the difference between
interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 2017, taxable
equivalent net interest income increased $6.1 million, or 8.7%, from 2016. Interest-earning assets averaged $1.923
billion during 2017, increasing $162.0 million compared to 2016. The Company’s interest-bearing liabilities
increased 7.3% from $1.351 billion in 2016 to $1.449 billion in 2017. The previously mentioned acquisition of
Monitor increased interest-earning assets by $38.1 million and interest-bearing liabilities by $17.8 million at the
completion date.
The Company finances its earning assets with a combination of interest-bearing and interest-free funds. The
interest-bearing funds are composed of deposits, short-term borrowings and long-term debt. Interest paid for the use
31
of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits
and stockholders’ equity, require no interest expense and, therefore, contribute significantly to net interest income.
The profit margin, or spread, on invested funds is a key performance measure. The Company monitors two
key performance indicators - net interest spread and net interest margin. The net interest spread represents the
difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing
liabilities. The net interest spread in 2017 was 3.88%, decreasing from 3.94% in 2016. The net interest margin
represents the overall profit margin – net interest income as a percentage of total interest-earning assets. This
performance indicator gives effect to interest earned for all investable funds including the substantial volume of
interest-free funds. For 2017, the net interest margin, measured on a fully taxable equivalent basis, decreased to
3.99%, compared to 4.01% in 2016. The net interest margin, excluding the impact of amortization and accretion
from acquisitions, improved one basis point to 3.96% for the year ended December 31, 2017. The accretion added
$49.6 thousand per month during 2017 and will continue over the next several years.
The slight decrease in net interest margin is mainly due to pressure on increasing deposit rates as the Federal
Reserve Bank continues to raise the federal funds interest rate. Total taxable equivalent interest income was $83.7
million for 2017, which is $8.6 million more than the $75.1 million reported in 2016. In comparing the years ending
December 31, 2017 and 2016, yields on earning assets increased 9 basis points while the cost of interest bearing
liabilities increased 15 basis points. Average loans increased $149.2 million, or 11.1%, in 2017, and the loan yield
decreased one basis point to 4.73%. Tax equated income from securities, federal funds and other increased $1.8
million, or 15.9%, in 2017. Farmers saw its yields on these assets increase from 2.72% in 2016 to 3.05% in 2017
and the average balance of investment securities and federal funds sold also increased from $416.8 million in 2016
to $429.6 million in 2017.
Total interest expense amounted to $6.9 million for 2017, a 57.2% increase from $4.4 million reported in 2016.
The increase in 2017 is the result of a $49.1 million or 4.4% increase in interest-bearing deposits and a $49.1 million or
21.2% increase in other borrowings. The cost of interest-bearing liabilities increased from 0.32% in 2016 to 0.47% in
2017.
Management will continue to evaluate future changes in interest rates and the shape of the treasury yield curve
so that assets and liabilities may be priced accordingly to minimize the impact on the net interest margin.
Noninterest Income
Total noninterest income increased by $807 thousand or 3.5% in 2017. The increase in noninterest income is
due to several factors. Gains on the sale of mortgage loans increased from $2.8 million to $3.1 million, representing
an increase of $300 thousand or 8%. Insurance agency commissions also increased to $2.4 million compared to $1.6
million in 2016 and service charges on deposit accounts increased from $4.0 million in 2016 to $4.1 million in 2017,
reflecting the size of the company of after the two bank acquisitions. Debit card interchange fees also increased
$430 thousand or 16.1%. These increases were offset by a decrease in other operating income of $478 thousand and
a decrease in investment commissions of $291 thousand. The Bank and Company expect these amounts to increase
during 2018 as management continues to focus on growing the various sources of noninterest income.
Noninterest Expenses
Noninterest expense for 2017 was $61.6 million, compared to $59.5 million in 2016, representing an increase
of $2.1 million, or 3.6%. Most of the increase was from salaries and employee benefits, which increased $2.9
million or 8.9%, mainly due to an increase in salaries, as the previously mentioned acquisition of Bowers was
completed on June 1, 2016 which resulted in seven months of expense in 2016 compared to a full year in 2017. The
Company also experienced an increase in employee health care insurance expense in 2017. The Company’s full
time equivalent employees (“FTE”) increased by 1.0% from December 31, 2016 to December 31, 2017. Other
operating expenses decreased by $1.0 million as a result of increased efficiencies gained as the Company grew in
2017. Excluding expenses related to acquisition activities, noninterest expenses measured as a percentage of
average assets decreased from 3.06% in 2016 to 2.93% in 2017.
32
The Company’s tax equivalent efficiency ratio for the twelve month period ended December 31, 2017 was
59.66%, compared to 61.59% for the same period in 2016. Excluding expenses related to acquisition activities, the
efficiency ratio for the year ended December 31, 2017 improved to 58.79% compared to 60.99% in 2016. The main
factors leading to the improvement in the efficiency ratio was the increase in net interest income and noninterest
income, along with the stabilized level of noninterest expenses relative to average assets as explained in the
preceding paragraph. The efficiency ratio is calculated as follows: non-interest expense divided by the sum of tax
equivalent net interest income plus non-interest income, excluding security gains and losses and intangible
amortization. This ratio is a measure of the expense incurred to generate a dollar of revenue. Management will
continue to closely monitor and keep the increases in other expenses to a minimum.
Income Taxes
Income tax expense totaled $10.1 million for 2017 and $7.5 million in 2016. Income taxes are computed
using the appropriate effective tax rates for each period. The increase in the current year tax expense is a result of a
16.9% increase in income before income taxes, from $28 million in 2016 to $32.8 million in 2017. The previously
mentioned Tax Cuts and Jobs Act also added $1.8 million to the current year’s income tax expense as a result of the
write-down of the Company’s deferred tax asset from 35% to 21%. The effective tax rates are less than the statutory
tax rate primarily due to nontaxable interest and dividend income. The effective income tax rate was 30.7% for
2017 and 26.7% for 2016. Based on early projections, we anticipate that the new effective tax rate in 2018 could be
in the range of 15% to 19%. Refer to Note 16 to the consolidated financial statements for additional information
regarding the effective tax rate.
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015.
The Company’s net income totaled $20.6 million during 2016, compared to $8.1 million for 2015. On a per
share basis, diluted earnings per share were $0.76 as compared to $0.36 diluted earnings per share for 2015.
Excluding expenses related to acquisition activities, net income for 2016 would have been $21.0 million, or $0.78
per share and net income for 2015 would have been $12.9 million or $0.57 per share. Common comparative ratios
for results of operations include the return on average assets and return on average stockholders’ equity. For 2016,
the return on average equity was 9.72%, compared to 4.97% for 2015. The return on average assets was 1.07% for
2016 and 0.54% for 2015. Excluding expenses related to acquisition activities, the return on average assets and
return on average stockholders’ equity were 1.09% and 9.92% in 2016, compared to 0.87% and 7.95% in 2015,
respectively.
The results for 2016 included $73 thousand in gains on sales of securities, compared to $94 thousand in 2015.
Net Interest Income
For 2016, taxable equivalent net interest income increased $18.8 million, or 36.3%, from 2015. Interest-
earning assets averaged $1.761 billion during 2016, increasing $398.6 million compared to 2015. The Company’s
interest-bearing liabilities increased 27.8% from $1.057 billion in 2015 to $1.351 billion in 2016. The NBOH and
Tri-State acquisitions increased interest-earning assets by $647.5 million and interest-bearing liabilities by $605.5
million at their respective completion dates.
Total taxable equivalent interest income was $75.1 million for 2016, which is $19.1 million more than the
$56.0 million reported in 2015. In comparing the years ending December 31, 2016 and 2015, yields on earning
assets increased 15 basis points while the cost of interest bearing liabilities decreased similarly at seven basis points.
Average loans increased $388.9 million, or 40.7%, in 2016, and the loan yield remained unchanged at 4.74%. Tax
equated income from securities, federal funds and other increased $591 thousand, or 5.50%, in 2016. Farmers saw
its yields on these assets increase slightly from 2.64% in 2015 to 2.72% in 2016. The average balance of investment
securities and federal funds sold also increased from $407.2 million in 2015 to $416.8 million in 2016.
Total interest expense amounted to $4.4 million for 2016, a 7.0% increase from $4.1 million reported in 2015.
The increase in 2016 is the result of a $204.9 million increase in interest-bearing deposits and an $89.0 million
33
increase in other borrowings. The cost of interest-bearing liabilities decreased from 0.39% in 2015 to 0.32% in
2016.
Noninterest Income
Total noninterest income increased by $4.9 million in 2016. The increase in noninterest income is due to
several factors. Gains on the sale of mortgage loans increased from $1.1 million to $2.8 million, representing an
increase of $1.7 million. Insurance agency commissions also increased to $1.6 million compared to $569 thousand
in 2015 and service charges on deposit accounts increased from $3.3 million in 2015 to $4.0 million in 2016,
reflecting the size of the company after the two bank acquisitions. Debit card interchange fees also increased $780
thousand or 41.5%. Other operating income also increased $599 thousand, primarily as a result of the positive
impact from account level transaction volumes from the merger related growth.
Noninterest Expenses
Noninterest expense for 2016 was $59.5 million, compared to $54.0 million in 2015, representing an increase
of $5.5 million, or 10.1%. Most of the increase was from salaries and employee benefits, which increased $5.3
million or 19.8%, mainly due to an increase in the number of employees resulting from the mergers. The
Company’s full time equivalent employees (“FTE”) increased by 8.5% from December 31, 2015 to December 31,
2016. Occupancy and equipment costs also increased $1.2 million due to additional banking locations resulting
from the mergers. Excluding expenses related to acquisition activities, noninterest expenses measured as a
percentage of average assets decreased from 3.21% in 2015 to 3.06% in 2016.
The Company’s tax equivalent efficiency ratio for the 12 month period ended December 31, 2016 was
61.59%, compared to 75.26% for the same period in 2015. Excluding expenses related to acquisition activities, the
efficiency ratio for the year ended December 31, 2016 improved to 60.99%. The main factors leading to the
improvement in the efficiency ratio was the increase in net interest income and noninterest income, along with the
stabilized level of noninterest expenses relative to average assets as explained in the preceding paragraph. The
efficiency ratio is calculated as follows: non-interest expense divided by the sum of tax equivalent net interest
income plus non-interest income, excluding security gains and losses and intangible amortization. This ratio is a
measure of the expense incurred to generate a dollar of revenue. Management will continue to closely monitor and
keep the increases in other expenses to a minimum.
Income Taxes
Income tax expense totaled $7.5 million for 2016 and $2.5 million in 2015. The increase in the current year
tax expense can be mainly attributed to the $17.5 million increase in income before taxes. The effective tax rates are
less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective income tax
rate was 26.7% for 2016 and 23.7% for 2015.
Liquidity
Farmers maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and
meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as
well as acquiring new funds. The Company’s ability to attract deposits and borrow funds depends in large measure
on its profitability, capitalization and overall financial condition.
Principal sources of liquidity include assets considered relatively liquid, such as short-term investment
securities, federal funds sold and cash and due from banks.
Along with its liquid assets, Farmers has additional sources of liquidity available which help to insure that
adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the
ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings
on approved lines of credit at three major domestic banks. At December 31, 2017, Farmers had not borrowed
against these lines of credit. Management feels that its liquidity position is more than adequate and will continue to
monitor the position on a monthly basis. The Company also has additional borrowing capacity with the FHLB, as
well as access to the Federal Reserve Discount Window, which provides an additional source of funds. The
34
Company views its membership in the FHLB as a solid source of liquidity. As of December 31, 2017, the Bank is
eligible to borrow an additional $60 million from the FHLB under various fixed rate and variable rate credit
facilities. Advances outstanding from the FHLB at December 31, 2017 amounted to $219.8 million.
Farmers’ primary investing activities are originating loans and purchasing securities. During 2017, net cash
used by investing activities amounted to $137.1 million, compared to $115.4 million used in 2016. Net increases in
loans were $132.3 million in 2017, compared to $133.2 million in 2016. The cash used by lending activities during
2017 can be attributed to the activity in the commercial real estate, residential real estate, and agricultural loan
portfolios. Purchases of securities available for sale were $114.6 million in 2017, compared to $52.6 million in
2016, and proceeds from maturities and sales of securities available for sale were $97.6 million in 2017, compared
to $71.4 million in 2016. Net cash of $16.3 million was received as a result of the acquisition of Monitor in 2017.
Farmers’ primary financing activities are obtaining deposits, repurchase agreements and other borrowings.
Net cash provided by financing activities amounted to $122.4 million for 2017, compared to $76.7 million in 2016.
The majority of this increase can be attributed to the net change in short-term borrowings as the Company increased
their short-term borrowings by $91.1 million in 2017 compared to a $27.4 million decrease in 2016. The increase in
short-term borrowings is mainly a result of loan growth outpacing deposit growth during 2017. Deposits increased
$45.4 million in 2017, compared to a $115.7 million increase in 2016.
Loan Portfolio
Maturities and Sensitivities of Loans to Interest Rates
The following schedule shows the composition of loans and the percentage of loans in each category at the
dates indicated. Balances include unamortized loan origination fees and costs.
2016
2017
Years Ended
December 31,
Commercial
Real Estate...... $ 512,502 32.5% $ 445,966 31.2% $ 408,534 31.5% $222,573 33.5% $217,362 34.4%
Commercial .......
Residential
Real Estate......
Consumer ..........
Agricultural .......
Total Loans ....... $1,577,381 100.0% $1,427,635 100.0% $1,296,865 100.0% $663,852 100.0% $630,684 100.0%
183,853 27.7
137,276 20.7
11 0.0
170,151 27.0
138,148 21.9
12 0.0
394,582 30.4
185,077 14.3
109,215 8.4
430,195 30.1
218,100 15.3
129,015 9.1
468,884 29.7
212,935 13.5
163,087 10.4
120,139 18.1
105,011 16.7
199,457 15.4
204,359 14.3
219,973 13.9
2013
2014
2015
The following schedule sets forth maturities based on remaining scheduled repayments of principal for
commercial and commercial real estate loans listed above as of December 31, 2017:
Types of Loans
1 Year or less
Commercial ................................................................... $
Commercial Real Estate ................................................ $
Agricultural.................................................................... $
18,553 $
33,628 $
3,056 $
1 to 5 Years Over 5 Years
95,456
400,224
136,160
105,964 $
78,650 $
23,871 $
The amounts of commercial, commercial real estate and agricultural loans as of December 31, 2017, based on
remaining scheduled repayments of principal, are shown in the following table:
Loan Sensitivities
1 Year or less Over 1 Year
Total
Floating or Adjustable Rates of Interest ........................ $
Fixed Rates of Interest...................................................
Total Loans .................................................................... $
34,619 $
20,618
55,237 $
589,883 $
250,442
840,325 $
624,502
271,060
895,562
35
Total loans were $1.6 billion at year-end 2017, compared to $1.4 billion at year-end 2016. Loans grew 9%
organically during the past twelve months. The organic increase in loans is a direct result of Farmers’ focus on loan
growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline. Most of the
increase in loans has occurred in the commercial real estate, agricultural, residential real estate and commercial loan
portfolios. Loans comprised 77.7% of the Bank’s average earning assets in 2017, compared to 76.3% in 2016. The
Company has also experienced growth in its originated loans portfolio as a result of loans previously acquired from
earlier bank mergers being renewed and recorded into the originated book. The product mix in the loan portfolio
includes commercial loans comprising 13.9%, residential real estate loans 29.7%, commercial real estate loans
32.5%, consumer loans 13.5% and agricultural loans 10.4% at December 31, 2017, compared with 14.3%, 30.1%,
31.2%, 15.3% and 9.1%, respectively, at December 31, 2016.
Loans contributed 84.3% of total taxable equivalent interest income in 2017 and 84.9% in 2016. Loan yields
were 4.73% in 2017, 38 basis points greater than the average rate for total earning assets. Management recognizes
that while the loan portfolio holds some of the Bank’s’ highest yielding assets, it is inherently the most risky
portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards.
Management has developed and maintains comprehensive underwriting guidelines and a loan review function that
monitors credits during and after the approval process. To minimize risks associated with changes in the borrower’s
future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all
types of loans and normally requires collateral. Commercial loans at December 31, 2017 increased 7.6% from year-
end 2016 with outstanding balances of $220.0 million. The Bank’s commercial loans are granted to customers
within the immediate trade area of the Bank. The mix is diverse, covering a wide range of borrowers, business types
and local municipalities. The Bank monitors and controls concentrations within a particular industry or segment of
the economy. These loans are made for purposes such as equipment purchases, capital and leasehold improvements,
the purchase of inventory, general working capital and small business lines of credit.
Residential real estate mortgage loans increased to $468.9 million at December 31, 2017, compared to $430.2
million in 2016. Farmers originated both fixed rate and adjustable rate mortgages during 2017. Fixed rate terms are
generally limited to fifteen year terms while adjustable rate products are offered with maturities up to thirty years.
Commercial real estate loans increased from $446.0 million at December 31, 2016 to $512.5 million at
December 31, 2017, an increase of $66.5 million or 14.9%. The Company’s commercial real estate loan portfolio
includes loans for owner occupied and non-owner occupied real estate. These loans are made to finance properties
such as office and industrial buildings, hotels and retail shopping centers.
The growth in the commercial and commercial real estate loan portfolios was consistent with the
improvements in the local economy. Several new projects announced in the Company’s market area, along with
decreased levels of unemployment have led small business owners to expand or make additional investments in their
operations.
Agricultural loans increased from $129.0 million in 2016 to $163.1 million in 2017, an increase of $34.1
million or 26.4%. The Company’s agricultural loan portfolio contains a diverse mix of dairy, crops, land, poultry
and cattle loans.
36
Summary of Loan Loss Experience
The following is an analysis of the allowance for loan losses for the periods indicated:
Years Ended December 31,
Balance at Beginning of Year............................ $
Charge-Offs:
2017
10,852
$
2016
8,978
$
2015
7,632
$
2014
7,568
$
2013
7,629
Commercial Real Estate...............................
Commercial..................................................
Residential Real Estate.................................
Consumer .....................................................
Total Charge-Offs ........................................
(207)
(375)
(162)
(2,542)
(3,286)
(349)
(245)
(188)
(2,019)
(2,801)
(536)
(290)
(320)
(2,058)
(3,204)
Recoveries on Previous Charge-Offs:
Commercial Real Estate...............................
Commercial..................................................
Residential Real Estate.................................
Consumer .....................................................
Total Recoveries ..........................................
Net Charge-Offs ................................................
Provision For Loan Losses ................................
Balance at End of Year...................................... $
Ratio of Net Charge-offs to Average Loans
Outstanding.....................................................
Allowance for Loan Losses/Total Loans...........
592
66
100
641
1,399
(1,887)
3,350
12,315
$
15
45
112
633
805
(1,996)
3,870
10,852
$
130
9
122
779
1,040
(2,164)
3,510
8,978
$
0.13%
0.78
0.15%
0.76
0.22%
0.69
0.28%
1.15
0.23%
1.20
(151)
(185)
(585)
(2,213)
(3,134)
125
29
77
1,087
1,318
(1,816)
1,880
7,632
$
(505)
(99)
(326)
(1,723)
(2,653)
171
262
47
822
1,302
(1,351)
1,290
7,568
Provisions charged to operations amounted to $3.4 million in 2017, compared to $3.9 million in 2016, a
decrease of $520 thousand. This decrease is primarily due to the lower level of net charge-offs in 2017 and the
decrease in past due and nonperforming loans. Net charge-offs for the year ended December 31, 2017 were $1.9
million, $109 thousand less than net charge-offs for the year ended December 31, 2016. The allowance for loan
losses to total loans increased from 0.76% at December 31, 2016 to 0.78% at December 31, 2017. When the
acquired loans from the NBOH and Tri-State mergers are excluded the ratio is 0.97% at December 31, 2017 and
1.03% at December 31, 2016, and compares similarly with the periods prior to 2015 presented in the above table.
Additionally, when loans collectively evaluated for impairment, which excludes acquired loans, are compared to the
allowance for loan losses for loans collectively evaluated for impairment the ratio is 0.96% for the year ended
December 31, 2017, compared to 1.01% for the year ended December 31, 2016. Nonperforming loans to total loans
decreased from 0.57% at December 31, 2016 to 0.49% at December 31, 2017. In determining the estimate of the
allowance for loan losses, management computes the historical loss percentage based upon the loss history of the
past 12 quarters. The Company believes that using a loss history of the previous 12 quarters helps mitigate volatility
in the timing of charge-offs and better reflects probable incurred losses.
The provision for loan losses charged to operating expense is based on management’s judgment after taking
into consideration all factors connected with the collectability of the existing loan portfolio. Management evaluates
the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry
standards and other relevant factors. Specific factors considered by management in determining the amounts
charged to operating expenses include previous charge-off experience, the status of past due interest and principal
payments, the quality of financial information supplied by loan customers and the general condition of the industries
in the community to which loans have been made.
The allowance for loan losses increased $1.5 million during the year. Aside from the various credit quality
metrics discussed above, another reason for the increase in the current year allowance for loan losses was an
increase in the size of the loan portfolio. Loan growth in 2017 amounted to 10.5%.
37
At December 31, 2017, commercial loans collectively evaluated for impairment totaled $225.3 million with an
allowance allocation of $2.0 million compared to commercial loans collectively evaluated for impairment of $195.1
million with an allowance for loan losses of $1.8 million at December 31, 2016. The commercial loan portfolio
experienced a provision of $446 thousand, compared to a $701 thousand provision in 2016. Impaired loans are
carried at the fair value of the underlying collateral, less estimated disposition costs, if repayment of the loan is
expected to be solely dependent on the sale of the collateral. Otherwise, impaired loans are carried at the present
value of expected cash flows.
Typically, commercial and commercial real estate loans are identified as impaired when they become ninety
days past due, or earlier if management believes it is probable that the Company will not collect all amounts due
under the terms of the loan agreement. When Farmers identifies a loan as impaired and also concludes that the loan
is collateral dependent, Farmers performs an internal collateral valuation as an interim measure. Farmers typically
obtains an external appraisal to validate its internal collateral valuation as soon as is practical and adjusts the
associated specific loss reserve, if necessary.
The ratio of the allowance for loan losses to non-performing loans at December 31, 2017 improved to
160.04%, compared to 132.83% at December 31, 2016. Increases in nonaccrual loans in the residential real estate
loan and consumer loan portfolios were offset by decreases in the commercial real estate and agricultural loan
portfolios. The balance in the allowance for loan losses increased in 2017, with the increased loan portfolio size, to
$12.3 million compared to $10.9 million in 2016.
Nonperforming Assets
December 31,
Nonaccrual loans:
2017
2016
2015
2014
2013
Commercial Real Estate ............................................ $
717
Commercial ............................................................... 1,192
Residential Real Estate.............................................. 4,038
660
Consumer...................................................................
Agricultural ...............................................................
56
Total Nonaccrual Loans ............................................ $ 6,663
Loans Past Due 90 Days or More ................................... 1,032
Total Nonperforming Loans ........................................... $ 7,695
$ 1,410
1,361
2,636
396
686
$ 6,489
1,681
$ 8,170
$ 3,803
1,609
3,116
457
73
$ 9,058
1,387
$10,445
$ 3,273
1,645
2,881
126
83
$ 8,008
473
$ 8,481
$3,117
1,993
2,864
363
94
$8,431
646
$9,077
171
Other Real Estate Owned................................................
Total Nonperforming Assets........................................... $ 7,866
482
$ 8,652
942
$11,387
148
$ 8,629
171
$9,248
Loans modified in troubled debt restructurings .............. $ 4,980
TDRs included in Nonaccrual Loans.............................. $ 2,624
Percentage of Nonperforming Loans to Total Loans......
Percentage of Nonperforming Assets to Total Assets ....
Loans Delinquent 30-89 days ......................................... 10,191
Percentage of Loans Delinquent 30-89 days to
Total Loans ..................................................................
$ 7,007
$ 3,113
$ 9,325
$ 4,733
$ 8,110
$ 1,436
$8,280
$1,957
0.49%
0.36%
0.57%
0.44%
0.81% 1.28% 1.44%
0.61% 0.76% 0.81%
12,746
9,129
5,426
3,658
0.65%
0.89%
0.70% 0.82% 0.58%
The Company has forgone interest income of approximately $264 thousand from nonaccrual loans as of
December 31, 2017 that would have been earned, over the life of the loans, if all loans had performed in accordance
with their original terms.
Net charge-offs as a percentage of average loans outstanding decreased from 0.15% for 2016 to 0.13% for
2017 as a result of the larger loan portfolio and improved loan quality. Net charge-offs decreased from $2.0 million
in 2016 to $1.9 million in 2017. An increase in gross charge-offs was experienced in the consumer and commercial
loan portfolios of $523 thousand and $130 thousand respectively, but those were offset by decreases in the
commercial real estate and residential real estate loan portfolios of $142 thousand and $26 thousand, respectively.
38
The following table summarizes the Company’s allocation of the allowance for loan losses for the past five
years:
December 31,
2017
Loans to
2016
2015
2014
2013
Amount Total Loans
Loans to
Amount Total Loans
Loans to
Amount Total Loans
Loans to
Amount Total Loans
Loans to
Amount Total Loans
Commercial Real Estate .. $ 4,260
Commercial ..................... 2,011
Residential Real Estate.... 2,521
Consumer......................... 2,848
675
Unallocated......................
$12,315
40.0% $ 3,577
1,874
16.8
2,205
29.7
2,766
13.5
430
0
100.0% $10,852
37.4% $ 3,127
1,373
17.2
1,845
30.1
2,160
15.3
473
0
100.0% $ 8,978
37.5% $ 2,676
1,420
17.8
1,689
30.4
1,663
14.3
184
0
100.0% $ 7,632
33.5% $ 2,752
1,219
18.1
1,964
27.7
1,419
20.7
214
0
100.0% $ 7,568
34.4%
16.7
27.0
21.9
0
100.0%
The allowance allocated to each of the four loan categories should not be interpreted as an indication that
charge-offs in 2017 will occur in the same proportions or that the allocation indicates future charge-off trends. The
allowance allocated to the one-to-four family real estate loan category and the consumer loan category is based upon
the Company’s allowance methodology for homogeneous loans, and increases and decreases in the balances of those
portfolios. In previous years, the indirect installment loan category has represented the largest percentage of loan
losses. The consumer loan category represents approximately 13.5% of total loans and in 2017, the gross charge-
offs accounted for 77.4% of the losses of the entire loan portfolio. For the commercial loan category, which
represents 16.8% of the total loan portfolio, management relies on the Bank’s internal loan review procedures and
allocates accordingly based on loan classifications. The gross charge-offs in the commercial real estate portfolio,
which represents 40.0% of the total portfolio, was $207 thousand for 2017.
There were no loans other than those identified above, that management has known information about
possible credit problems of borrowers and their ability to comply with the loan repayment terms. Management is
actively monitoring certain borrowers’ financial condition and loans which management wants to more closely
monitor due to special circumstances. These loans and their potential loss exposure have been considered in
management’s analysis of the adequacy of the allowance for loan losses.
Loan Commitments and Lines of Credit
In the normal course of business, the Bank has extended various commitments for credit. Commitments for
mortgages, revolving lines of credit and letters of credit generally are extended for a period of one month up to one
year. Normally, no fees are charged on any unused portion, but an annual fee of two percent is charged for the
issuance of a letter of credit.
As of December 31, 2017, there were no concentrations of loans exceeding 10% of total loans that are not
disclosed as a category of loans. As of that date, there were also no other interest-earning assets that are either
nonaccrual, past due, restructured or non-performing.
Investment Securities
The investment securities portfolio increased $23.3 million in 2017. This increase is a result of maintaining
the security portfolio’s at a constant level, as a percentage of total assets, during 2017’s growth in assets. The
Company’s investment strategy is to maintain a diverse investment security portfolio with a higher concentration in
tax-free municipal securities and mortgage-backed securities that are issued by U.S. Government sponsored
enterprises. Farmers sold $54.5 million in securities in 2017, resulting in net security gains of $4 thousand. Farmers
recognized market appreciation on faster paying mortgage-backed securities and lower rated municipal securities,
and reinvested in new mortgage-backed securities and higher rated municipal securities to further diversify the
securities portfolio. During 2014, the Company created the Investment subsidiary to hold municipal securities and
take advantage of more favorable tax treatment. At December 31, 2017, the Investment entity had a balance of
$95.5 million in municipal securities.
39
Farmers’ objective in managing the investment portfolio is to preserve and enhance corporate liquidity
through investment in primarily short and intermediate term securities which are readily marketable and of the
highest credit quality. In general, investment in securities is limited to those funds the Bank feels it has in excess of
funds used to satisfy loan demand and operating considerations.
The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated
with a depository institution, subject to certain exceptions. The Bank does not engage in any of the trading activities
or own any of the types of funds regulated by the Volcker Rule.
Mortgage-backed securities are created by the pooling of mortgages and issuance of a security. Mortgage-
backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages.
Prepayment estimates for mortgage-backed securities are performed at purchase to ensure that prepayment
assumptions are reasonable considering the underlying collateral for the mortgage-backed securities at issue and
current mortgage interest rates and to determine the yield and estimated maturity of the mortgage-backed security
portfolio. Prepayments that are faster than anticipated may shorten the life of the security and may result in faster
amortization of any premiums paid and thereby reduce the net yield on such securities. During periods of declining
mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages
and the related security. All holdings of mortgage-backed securities were issued by U.S. Government sponsored
enterprises.
The following table shows the carrying value of investment securities by type of obligation at the dates
indicated:
Type
December 31,
U.S. Treasury securities .................................................................... $
U.S. government sponsored enterprise debt securities .....................
Mortgage-backed securities - residential and collateralized
mortgage obligations......................................................................
Small Business Administration .........................................................
Obligations of states and political subdivisions ................................
Equity securities ................................................................................
Corporate bonds ................................................................................
$
2017
4,278 $
4,639
2016
1,211 $
4,710
177,571
14,212
191,003
394
1,234
393,331 $
190,375
16,706
155,303
351
1,339
369,995 $
2015
1,192
9,914
223,752
19,299
138,723
298
1,134
394,312
40
A summary of debt securities held at December 31, 2017 classified according to maturity and including
weighted average yield for each range of maturities is set forth below:
Type and Maturity Grouping
December 31, 2017
Fair Value
Weighted
Average
Yield (1)
U.S. Treasury securities
Maturing within one year................................................................................. $
Maturing after one year but within five years..................................................
Maturing after five years but within ten years .................................................
Total U.S. Treasury securities ....................................................................... $
U.S. government sponsored enterprise debt securities
Maturing within one year................................................................................. $
Maturing after one year but within five years..................................................
Maturing after five years but within ten years .................................................
Maturing after ten years ...................................................................................
Total U.S. government sponsored enterprise debt securities ........................ $
3,070
693
515
4,278
748
3,123
675
93
4,639
Mortgage-backed securities - residential and collateralized mortgage
obligations (2)
Maturing within one year................................................................................. $
Maturing after one year but within five years..................................................
Maturing after five years but within ten years .................................................
Maturing after ten years ...................................................................................
Total mortgage-backed securities.................................................................. $
24,318
70,713
49,044
33,496
177,571
Small Business Administration
Maturing within one year................................................................................. $
Maturing after one year but within five years..................................................
Maturing after five years but within ten years .................................................
Total small business administration .............................................................. $
16
15
14,181
14,212
Obligations of states and political subdivisions
Maturing within one year................................................................................. $
Maturing after one year but within five years..................................................
Maturing after five years but within ten years .................................................
Maturing after ten years ...................................................................................
Total obligations of states and political subdivisions ................................... $
14,861
43,090
120,473
12,579
191,003
Corporate bonds
Maturing within one year................................................................................. $
Maturing after one year but within five years..................................................
Maturing after five years but within ten years .................................................
Total other securities ..................................................................................... $
350
679
205
1,234
1.07%
1.74%
1.94%
1.29%
1.37%
1.68%
2.73%
2.25%
1.80%
2.37%
2.39%
2.43%
2.70%
2.45%
3.49%
3.42%
2.08%
2.08%
2.62%
3.10%
3.93%
3.78%
3.62%
1.72%
1.94%
2.71%
1.99%
(1)
The weighted average yield has been computed by dividing the total contractual interest income adjusted for
amortization of premium or accretion of discount over the life of the security by the par value of the securities
outstanding. The weighted average yield of tax-exempt obligations of states and political subdivisions has
been calculated on a fully taxable equivalent basis. The amounts of adjustments to interest which are based on
the new statutory tax rate of 21% as written in the Tax Cuts and Jobs Act were $81 thousand, $263 thousand,
$931 and $101 thousand for the four ranges of maturities.
41
(2)
Payments based on contractual maturity.
Premises and Equipment
Premises and equipment had a net decrease of $939 thousand in 2017 as a result of the sale of land and bank
premises amounting to $439 thousand and depreciation of $1.6 million. This was offset by new additions of
premises and equipment amounting to $1.1 million.
Deposits
Deposits represent the Company’s principal source of funds. The deposit base consists of demand deposits,
savings and money market accounts and other time deposits. During the year, the Company’s average total deposits
increased from $1.468 billion in 2016 to $1.559 billion in 2017, representing an increase of 6.2%. Noninterest
demand deposits increased $42.2 million in 2017. Average interest bearing demand deposits increased $71.4
million, which was offset by a decrease in savings deposits of $19.5 million since December 31, 2016. With interest
rates continuing to be low in 2017, customers have little incentive to commit funds to term deposit accounts.
Average time deposits had a modest decrease of $2.7 million in 2017. The Company’s focus is on core deposit
growth and Farmers will continue to price deposit rates to remain competitive within the market and to retain
customers. At December 31, 2017, core deposits – savings and money market accounts, time deposits less than
$250 thousand, demand deposits and interest bearing demand deposits represented approximately 96.4% of total
deposits.
Bank Owned Life Insurance
Farmers’ owns bank owned life insurance policies on the lives of certain members of management. The
purpose of this investment is to help fund the costs of employee benefit plans. The cash surrender value of these
policies was $33.9 million at December 31, 2017, compared to $30.0 million at December 31, 2016.
Borrowings
Average short-term borrowings increased $59.2 million or 28.0% since December 31, 2016 as a result of loan
growth outpacing deposit growth in 2017. Most of the increase was in short-term Federal Home Loan Advances
(the “FHLB”). Average Long-term borrowings decreased $10.1 million or 51.0%, as maturing FHLB advances
were refinanced with short-term advances to capitalize on the favorable interest rates. See Note 10 and 11 within
Item 8 of this Annual report on Form 10-K for additional detail.
42
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
The following table presents, as of December 31, 2017, the Company’s significant fixed and determinable
contractual obligations by payment date. The payment amounts represent those amounts contractually due to the
recipient and do not include any unamortized premiums or discounts or other similar carrying value adjustments.
Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial
statements.
Commitments
12/31/2017
Note
Ref.
Deposits without maturity..........................
Certificates of deposit ................................
Repurchase agreements..............................
Short-term borrowed funds ........................
Short-term FHLB advances .......................
Long-term borrowings ...............................
Operating leases .........................................
9
10
10
10
11
7
2018
$1,340,814
2019 2020 2021 2022 Thereafter
92,678 46,243 35,619 55,086 20,424
74,215
350
215,000
1,075
425
931
419
729
270
860
384
792
380
13,855
2,607
973
There is also a $3 million additional commitment to SBIC investment funds over the next several years. The
payments have no predetermined due dates at year end 2017. Note 12 to the consolidated financial statements
discusses in greater detail other commitments and contingencies and the various obligations that exists under those
agreements. Examples of these commitments and contingencies include commitments to extend credit and standby
letters of credit.
At December 31, 2017, the Company did not engage in derivatives or hedging contracts that may expose the
Company to liabilities greater than the amounts recorded on the consolidated balance sheet. Management’s policy is
to not engage in derivatives contracts for speculative trading purposes. The Company does utilize interest-rate
swaps as a way of helping manage interest rate risk and not as derivatives for trading purposes. See Note 20 within
Item 8 of this Annual report on Form 10-K for additional detail.
Capital Resources
Total Stockholders’ Equity increased 13.5% from $213.2 million at December 31, 2016 to $242.1 million in
2017. The increase is due to the net income addition to retained earnings less the amount of dividends paid and
issuance of stock for the Monitor acquisition. During the year, shareholders received a total of $0.22 per share cash
dividends paid in the past four quarters, a 38% increase compared to the $0.16 cash dividend per share paid in 2016.
Book value increased 11.6% from $7.88 per share at December 31, 2016 to $8.79 per share at December 31, 2017.
The Company’s tangible book value also increased from $6.21 per share at December 31, 2016 to $7.14 per share at
December 31, 2017, an increase of 15.0%.
The Bank, as a national chartered bank, is subject to the dividend restrictions set forth by the OCC. The OCC
must approve declaration of any dividends in excess of the sum of profits for the current year and retained net profits
for the preceding two years (as defined). Farmers and Farmers Bank are required to maintain minimum amounts of
capital to total “risk weighted” assets, as defined by the banking regulators. At December 31, 2017, under the new
minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III),
Farmers Bank and Farmers are required to have minimum capital ratios. Actual and minimum ratios are detailed in
Note 14 of the Consolidated Financial Statements. Farmers Bank and Farmers had capital ratios above the
minimum levels at December 31, 2017 and 2016. At year-end 2017 and 2016, the most recent regulatory
notifications categorized Farmers Bank as well capitalized under the regulatory framework for prompt corrective
action.
43
During 2013, the Federal banking regulators approved a final rule to implement revised capital adequacy
standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant
provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-
based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt
corrective action thresholds. Community banking organizations, such as the Company and the Bank, became
subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of
2015 through 2019. The Bank has retained, through a one-time election, the prior treatment for most accumulated
other comprehensive income, such that unrealized gains and losses on securities available for sale that did not affect
regulatory capital amounts and ratios. As mentioned in the prior paragraph, the Bank falls within the new regulatory
capital ratio guidelines.
Critical Accounting Policies
The Company follows financial accounting and reporting policies that are in accordance with generally
accepted accounting principles in the United States of America and conform to general practices within the banking
industry. Some of these accounting policies are considered to be critical accounting policies. Critical accounting
policies are those policies that require management’s most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has
identified three accounting policies that are critical accounting policies and an understanding of these policies is
necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance
for loan losses, if there is any impairment of goodwill and other intangibles, and estimating the fair value of assets
acquired and liabilities assumed in connection with any merger activity. Additional information regarding these
policies is included in the notes to the consolidated financial statements, including Note 1 (Summary of Significant
Accounting Policies), Note 4 (Loans) and Note 2 (Business Combinations), and the section above captioned “Loan
Portfolio.” Management believes that the judgments, estimates and assumptions used in the preparation of the
consolidated financial statements are appropriate given the factual circumstances at the time.
Farmers maintains an allowance for loan losses. The allowance for loan losses is presented as a reserve
against loans on the balance sheets. Loan losses are charged off against the allowance for loan losses, while
recoveries of amounts previously charged off are credited to the allowance for loan losses. A provision for loan
losses is charged to operations based on management’s periodic evaluation of adequacy of the allowance. The
provision for credit losses provides for probable losses on loans.
Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates
related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of current economic trends and
conditions, all of which may be susceptible to significant change. The loan portfolio represents the largest asset
category on the consolidated balance sheets. Management’s assessment of the adequacy of the allowance for loan
losses considers individually impaired loans, pools of homogeneous loans with similar risk characteristics and other
environmental risk factors.
Pools of homogeneous loans with similar risk characteristics are assessed for probable losses. Probable losses
are estimated through application of historical loss experience. Historical loss experience data used to establish loss
estimates may not precisely correspond to the current portfolio. As a result, the historical loss experience used in the
allowance analysis may not be representative of actual unrealized losses inherent in the portfolio.
Management also evaluates the impact of environmental factors which pose additional risks that may not
adequately be addressed in the analyses described above. Such environmental factors could include: levels of, and
trends in, delinquencies and impaired loans, charge-offs and recoveries; trends in volume and terms of loans; effects
of any changes in lending policies and procedures including those for underwriting, collection, charge-off and
recovery; experience, ability, and depth of lending management and staff; national and local economic trends and
conditions; industry and geographic conditions; concentrations of credit such as, but not limited to, local industries,
their employees and suppliers; or any other common risk factor that might affect loss experience across one or more
components of the portfolio. The determination of this component of the allowances requires considerable
management judgment. To the extent actual outcomes differ from management estimates, additional provision for
credit losses could be required that could adversely affect earnings or financial position in future periods. The
“Loan Portfolio” section of this financial review includes a discussion of the factors driving changes in the
allowance for loan losses during the current period.
44
Management believes that the accounting for goodwill and other intangible assets also involves a higher
degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the
amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from
business combinations represents the value attributable to unidentifiable intangible assets in the business acquired.
The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the
ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace. The
goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in
earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over
sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S.
GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the
past and projected operating results for the subsidiaries and comparable industry information. At December 31,
2017, on a consolidated basis, Farmers had intangibles of $7.2 million subject to amortization and $38.2 million of
goodwill, which was not subject to periodic amortization.
Recent Accounting Pronouncements and Developments
Note 1 to the consolidated financial statements discusses new accounting policies adopted by Farmers during
2017 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted.
To the extent the adoption of new accounting standards materially affects financial condition, results of operations
or liquidity, the impacts are discussed in the applicable sections of this financial review and notes to the consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Important considerations in asset/liability management are liquidity, the balance between interest rate sensitive
assets and liabilities and the adequacy of capital. Interest rate sensitive assets and liabilities are those which have
yields on rates subject to change within a future time period due to maturity of the instrument or changes in market
rates. While liquidity management involves meeting the funds flow requirements of the Company, the management
of interest rate sensitivity focuses on the structure of these assets and liabilities with respect to maturity and
repricing characteristics. Balancing interest rate sensitive assets and liabilities provides a means of tempering
fluctuating interest rates and maintaining net interest margins through periods of changing interest rates. The
Company monitors interest rate sensitive assets and liabilities to determine the overall interest rate position over
various time frames.
45
The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to
monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income.
The following table shows the effect on net interest income and the net present value of equity in the event of a
sudden and sustained 300 basis point increase and 100 basis point decrease in market interest rates. The
assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes
in rates on interest bearing deposit accounts and loans, competition and various other factors that are difficult to
accurately predict.
Changes In Interest Rate (basis points)
Net Interest Income Change
+300 .............................................................................................
+200 .............................................................................................
+100 .............................................................................................
-100..............................................................................................
Net Present Value Of Equity Change
+300 .............................................................................................
+200 .............................................................................................
+100 .............................................................................................
-100..............................................................................................
2017
Result
2016
Result
ALCO
Guidelines
-1.9%
-1.0%
-0.5%
-3.3%
-7.5%
-3.7%
0.3%
-7.2%
-0.1%
0.2%
0.3%
-3.4%
-1.3%
0.6%
1.4%
-4.0%
15%
10%
5%
5%
20%
15%
10%
10%
All interest rate change results fall within policy limits for the year ended December 31, 2017 and 2016. A
report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly
basis. The Company has no market risk sensitive instruments held for trading purposes.
With the largest amount of interest sensitive assets and liabilities maturing within twelve months, the
Company monitors this area most closely. Early withdrawal of deposits, prepayments of loans and loan
delinquencies are some of the factors that can impact actual results in comparison to our simulation analysis. In
addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change
in net interest margin.
Interest rate sensitivity management provides some degree of protection against net interest income volatility.
It is not possible or necessarily desirable to attempt to eliminate this risk completely by matching interest sensitive
assets and liabilities. Other factors, such as market demand, interest rate outlook, regulatory restraint and strategic
planning also have an effect on the desired balance sheet structure.
46
Item 8. Financial Statements and Supplementary Financial Data.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Farmers National Banc Corp. (the “Company”) is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-
15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of;
our principal executive and principal financial officers and effected by the board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles and
includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on that
assessment, we believe that, as of December 31, 2017, our internal control over financial reporting is effective based
on those criteria.
Crowe Horwath LLP has audited the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017, as stated in their report dated March 6, 2018.
Kevin J. Helmick
President and Chief Executive Officer
Carl D. Culp
Senior Executive Vice President and Treasurer
47
Report of Independent Registered Public Accounting Firm
Crowe Horwath LLP
Independent Member Crowe Horwath International
Shareholders and the Board of Directors of
Farmers National Banc Corp.
Canfield, Ohio
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Farmers National Banc Corp. (the "Company")
as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the
related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control –
Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2017 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
48
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
We have served as the Company's auditor since 2003.
Cleveland, Ohio
March 6, 2018
Crowe Horwath LLP
49
CONSOLIDATED BALANCE SHEETS
(Table Dollar Amounts in Thousands except Per Share Data)
December 31,
ASSETS
Cash and due from banks ...................................................................................
Federal funds sold and other ..............................................................................
TOTAL CASH AND CASH EQUIVALENTS ......................................
$
2017
2016
17,785 $
39,829
57,614
19,678
22,100
41,778
Securities available for sale................................................................................
Loans held for sale .............................................................................................
393,331
272
369,995
355
Loans ..................................................................................................................
Less allowance for loan losses ...........................................................................
NET LOANS...........................................................................................
Premises and equipment, net ..............................................................................
Goodwill.............................................................................................................
Other intangibles ................................................................................................
Bank owned life insurance .................................................................................
Other assets ........................................................................................................
TOTAL ASSETS ....................................................................................
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing ......................................................................................
Interest-bearing .............................................................................................
TOTAL DEPOSITS ................................................................................
Short-term borrowings .......................................................................................
Long-term borrowings........................................................................................
Other liabilities ...................................................................................................
TOTAL LIABILITIES ............................................................................
$
$
1,577,381
12,315
1,565,066
22,286
38,201
7,168
33,877
41,254
2,159,069 $
412,346 $
1,192,373
1,604,719
289,565
6,994
15,717
1,916,995
1,427,635
10,852
1,416,783
23,225
37,164
7,990
30,048
38,775
1,966,113
366,870
1,157,886
1,524,756
198,460
15,036
14,645
1,752,897
Commitments and contingent liabilities (Note 12)
Stockholders' equity
Common Stock - Authorized 35,000,000 shares; issued 28,179,598 in
2017 and 27,713,811 in 2016...................................................................
Retained earnings..........................................................................................
Accumulated other comprehensive income (loss) ........................................
Treasury stock, at cost; 635,550 shares in 2017 and 666,147 shares
in 2016 .....................................................................................................
TOTAL STOCKHOLDERS' EQUITY...................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................
186,903
59,208
596
178,317
42,547
(2,791)
(4,633)
242,074
2,159,069 $
(4,857)
213,216
1,966,113
$
See accompanying notes
50
CONSOLIDATED STATEMENTS OF INCOME
(Table Dollar Amounts in Thousands except Per Share Data)
Years ended December 31,
INTEREST AND DIVIDEND INCOME
Loans, including fees .............................................................................. $
Taxable securities....................................................................................
Tax exempt securities .............................................................................
Dividends ................................................................................................
Federal funds sold and other interest income .........................................
TOTAL INTEREST AND DIVIDEND INCOME ..........................
INTEREST EXPENSE
Deposits...................................................................................................
Short-term borrowings ............................................................................
Long-term borrowings ............................................................................
TOTAL INTEREST EXPENSE .......................................................
NET INTEREST INCOME ..............................................................
Provision for loan losses .........................................................................
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ....................................................................
NONINTEREST INCOME
Service charges on deposit accounts.......................................................
Bank owned life insurance income, including death benefits.................
Trust fees.................................................................................................
Insurance agency commissions...............................................................
Security gains..........................................................................................
Retirement plan consulting fees..............................................................
Investment commissions.........................................................................
Net gains on sale of loans .......................................................................
Debit card and EFT fees .........................................................................
Other operating income...........................................................................
TOTAL NONINTEREST INCOME ................................................
NONINTEREST EXPENSE
Salaries and employee benefits...............................................................
Occupancy and equipment......................................................................
State and local taxes................................................................................
Professional fees .....................................................................................
Merger related costs................................................................................
Advertising..............................................................................................
FDIC insurance .......................................................................................
Intangible amortization ...........................................................................
Core processing charges .........................................................................
Telephone and data .................................................................................
Other operating expenses........................................................................
TOTAL NONINTEREST EXPENSE ..............................................
INCOME BEFORE INCOME TAXES............................................
2017
2016
2015
69,934 $
4,899
4,763
537
394
80,527
4,490
2,167
224
6,881
73,646
3,350
63,109 $
5,058
3,650
515
166
72,498
3,221
689
468
4,378
68,120
3,870
44,657
5,903
2,951
287
29
53,827
3,489
177
424
4,090
49,737
3,510
70,296
64,250
46,227
4,077
831
6,431
2,407
4
1,857
919
3,066
3,089
1,370
24,051
34,759
6,292
1,663
2,891
888
1,527
869
1,494
2,880
973
7,331
61,567
32,780
4,010
814
6,235
1,560
73
1,990
1,210
2,843
2,661
1,848
23,244
31,908
6,615
1,544
2,757
563
1,462
1,055
1,461
2,699
930
8,458
59,452
28,042
3,253
702
6,156
569
94
2,130
1,172
1,101
1,882
1,247
18,306
26,638
5,452
1,171
3,180
6,392
1,479
937
983
2,176
676
4,895
53,979
10,554
2,499
8,055
INCOME TAXES .......................................................................................
NET INCOME .................................................................................. $
10,069
22,711 $
7,485
20,557 $
EARNINGS PER SHARE:
Basic and Diluted.................................................................................... $
0.82 $
0.76 $
0.36
See accompanying notes.
51
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Table Dollar Amounts in Thousands except Per Share Data)
Years ended December 31,
NET INCOME .................................................................................. $
2017
22,711 $
2016
20,557 $
2015
8,055
Other comprehensive income (loss):
Net unrealized holding gains (losses) on available for sale
securities..............................................................................
Reclassification adjustment for gains realized in income ......
Net unrealized holding gains (losses)..........................................
Income tax effect....................................................................
Unrealized holding gains (losses), net of reclassification and
tax .............................................................................................
5,107
(4)
5,103
(1,786)
(4,270)
(73)
(4,343)
1,520
(1,403)
(94)
(1,497)
524
3,317
(2,823)
(973)
Change in funded status of post-retirement health plan ..............
Income tax effect....................................................................
Change in funded status of post-retirement health plan, net of
tax .............................................................................................
(55)
19
(156)
55
(36)
(101)
20
(7)
13
Other comprehensive income (loss), net of tax ...........................
3,281
(2,924)
(960)
TOTAL COMPREHENSIVE INCOME.......................... $
25,992 $
17,633 $
7,095
See accompanying notes.
52
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Table Dollar Amounts in Thousands except Per Share Data)
Years ended December 31,
COMMON STOCK
2017
2016
2015
Balance at beginning of year ....................................................... $
Issued 18,928 treasury shares under the Long Term
Incentive Plan ...........................................................................
Issued 465,787 shares in 2017, 123,280 in 2016 and 8,559,472
in 2015 as part of business combinations .................................
Stock compensation expense for unvested shares .......................
Balance at end of year .................................................................
178,317 $
176,287 $
106,021
(133)
0
0
6,358
2,361
186,903
1,138
892
178,317
69,780
486
176,287
RETAINED EARNINGS
Balance at beginning of year .......................................................
Net income...................................................................................
Decrease as a result of shares issued under the Long Term
Incentive Plan ...........................................................................
Increase as a result of a contingent payment as part of a
business combination................................................................
Reclassification of disproportionate tax effects...........................
Dividends declared:
$.22 cash dividends per share in 2017, $.16 per share in
2016 and $.12 per share 2015 .............................................
Balance at end of year .................................................................
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
42,547
22,711
26,316
20,557
20,944
8,055
(5)
73
(106)
0
0
0
0
0
0
(6,012)
59,208
(4,326)
42,547
(2,683)
26,316
Balance at beginning of year .......................................................
Reclassification of disproportionate tax effects...........................
Other comprehensive income (loss) ............................................
Balance at end of year .................................................................
(2,791)
106
3,281
596
133
0
(2,924)
(2,791)
1,093
0
(960)
133
TREASURY STOCK, AT COST
Balance at beginning of year .......................................................
Issued 11,669 shares in contingent payments as part of a
business combination................................................................
Reissued 18,928 and 3,000 shares in 2017 and 2015 under the
Long Term Incentive Plan ........................................................
Purchased 19,900 shares in 2016 and 26,800 shares in 2015......
Balance at end of year .................................................................
TOTAL STOCKHOLDERS' EQUITY AT END OF YEAR $
(4,857)
(4,689)
(4,498)
85
0
0
139
0
(4,633)
242,074 $
0
(168)
(4,857)
213,216 $
22
(213)
(4,689)
198,047
See accompanying notes.
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Table Dollar Amounts in Thousands except Per Share Data)
Years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................................................... $
Adjustments to reconcile net income to net cash from operating
activities:
2017
2016
2015
22,711 $
20,557 $
8,055
Provision for loan losses .........................................................................
Depreciation and amortization ................................................................
Net amortization of securities .................................................................
Security gains ..........................................................................................
Loss (gain) on land and building sales, net .............................................
Stock compensation expense...................................................................
Loss on sale of other real estate owned...................................................
Earnings on bank owned life insurance ..................................................
Origination of loans held for sale............................................................
Proceeds from loans held for sale ...........................................................
Net gains on sale of loans........................................................................
Net change in other assets and liabilities ................................................
NET CASH FROM OPERATING ACTIVITIES................................
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of securities available for
sale........................................................................................................
Proceeds from sales of securities available for sale....................................
Purchases of securities available for sale....................................................
Purchases of restricted stock.......................................................................
Loan originations and payments, net ..........................................................
Proceeds from sale of other real estate owned............................................
Purchase of bank owned life insurance.......................................................
Proceeds from land and building sales........................................................
Additions to premises and equipment.........................................................
Net cash (paid) received in business combinations ....................................
NET CASH FROM INVESTING ACTIVITIES .................................
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ................................................................................
Net change in short-term borrowings .........................................................
Repayments of long-term borrowings ........................................................
New advances for long term borrowing......................................................
Cash dividends paid ....................................................................................
Repurchase of common shares....................................................................
NET CASH FROM FINANCING ACTIVITIES ................................
NET CHANGE IN CASH AND CASH EQUIVALENTS..................
3,350
3,139
1,823
(4)
53
2,361
20
(831)
(56,810)
59,959
(3,066)
(2,139)
30,566
43,104
54,497
(114,600)
(842)
(132,597)
643
(3,000)
439
(956)
16,203
(137,109)
45,377
91,105
(8,091)
0
(6,012)
0
122,379
15,836
3,870
3,667
2,216
(73)
(238)
892
277
(814)
(64,599)
68,856
(2,843)
(7,273)
24,495
59,904
11,493
(52,628)
(200)
(133,248)
665
0
479
(788)
(1,073)
(115,396)
115,709
(27,372)
(7,178)
0
(4,326)
(168)
76,665
(14,236)
Beginning cash and cash equivalents..........................................................
Ending cash and cash equivalents............................................................... $
41,778
57,614 $
56,014
41,778 $
3,510
2,751
2,275
(94)
0
486
286
(702)
(46,201)
46,455
(1,101)
(9,397)
6,323
63,243
102,257
(72,683)
0
(139,656)
553
(6,000)
723
(1,299)
29,749
(23,113)
(44,659)
91,159
(3,228)
5,000
(2,683)
(213)
45,376
28,586
27,428
56,014
Supplemental cash flow information:
Interest paid................................................................................................. $
Income taxes paid ....................................................................................... $
6,754 $
8,800 $
4,316 $
9,410 $
4,047
2,620
Supplemental noncash disclosures:
Transfer of loans and property to other real estate owned.......................... $
Issuance of stock for business combinations .............................................. $
Contingent consideration for business combination ................................... $
Security purchases not settled..................................................................... $
279 $
6,358 $
85 $
0 $
482 $
1,138 $
880 $
927 $
888
69,780
0
1,338
See accompanying notes.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Farmers National Banc
Corp. and its wholly-owned subsidiaries, The Farmers National Bank of Canfield (“Bank”), Farmers Trust Company
(“Trust”), National Associates, Inc. (“NAI”) and Farmers National Captive, Inc. (“Captive”). Captive was formed
during 2016 and is a wholly-owned insurance subsidiary of the Company. The consolidated financial statements
also include the accounts of the Farmers National Bank of Canfield’s subsidiaries; Farmers National Insurance
(“Insurance”) and Farmers of Canfield Investment Co. (“Investments”). The Company acquired Monitor Bancorp,
Inc. (“Monitor”), the holding company of Monitor Bank in 2017 and First National Bank of Orrville (“First National
Bank”) a subsidiary of National Bancshares Corporation (“NBOH”) and 1st National Community Bank (“FNCB”) a
subsidiary of Tri-State 1st Banc, Inc. (“Tri-State”) during 2015 and consolidated all activity of these acquisitions
within the Bank. The Bank acquired Bowers Insurance Agency, Inc. (“Bowers”) and consolidated the activity of
Bowers with Farmers National Insurance (“Insurance”) during 2016, see Note 2. Together all entities are referred to
as “the Company.” All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations: The Company provides full banking services, including wealth management services and
mortgage banking activity, through the Bank. As a national bank, the Bank is subject to regulation of the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The primary area served by the
Bank is the northeastern region of Ohio through thirty nine (39) locations and two branch location in southwestern
Pennsylvania. The Company provides trust services through its Trust subsidiary, retirement consulting services
through its NAI subsidiary and insurance services through the Bank’s Insurance subsidiary. Trust has a state-
chartered bank license to conduct trust business from the Ohio Department of Commerce – Division of Financial
Institutions. The primary purpose of Investments is to invest in municipal securities. Captive provides property and
casualty insurance coverage to the Company and its subsidiaries. Captive pools resources with thirteen other similar
insurance subsidiaries of financial institutions to spread a limited amount of risk among the pool members and to
provide insurance where not currently available or economically feasible in today’s insurance market place.
Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Flows: Cash and cash equivalents include cash on hand, deposits with other financial institutions and federal
funds sold. Generally, federal funds are purchased and sold for one-day periods. Net cash flows are reported for
loan and deposit transactions, short term borrowings and other assets and liabilities.
Securities Available for Sale: Debt securities are classified as available for sale when they might be sold before
maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities
available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive
income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are
amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the
specific identification method. Purchases are recorded on the trade date.
Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and
more frequently when economic or market conditions warrant. For securities in an unrealized loss position,
management considers the extent and duration of the unrealized loss, and the financial condition and near-term
prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will
be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of
the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value
55
is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the
amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be
recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which
is recognized in other comprehensive income. The credit loss is defined as the difference between the present value
of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of
impairment is recognized through earnings.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized
losses, if any, are charged to earnings.
Mortgage loans held for sale are sold with or without servicing rights released. Gains and losses on sales of
mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for
loan losses. Substantially all loans are secured by specific items of collateral including business assets, consumer
assets, and commercial and residential real estate.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless
the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120
days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual
loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired loans.
For all classes of loans, when interest accruals are discontinued, interest accrued but not received for loans placed on
non-accrual is reversed against interest income. Interest on such loans is thereafter recorded on a cash-basis or cost-
recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments are reasonably assured.
Purchased Credit Impaired Loans: The Company purchased loans that have shown evidence of credit deterioration
since origination through the acquisition of First National Bank. These loans are recorded at the amount paid, such
that there is no carryover of the seller’s allowance for loan losses. The Company estimates the amount and timing of
expected cash flows for each loan, and the expected cash flows in excess of amount paid is recorded as interest
income over the remaining life of the loan. The excess of the loan’s contractual principal and interest over expected
cash flows is not recorded.
Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows
is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected
cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The Company’s
derivatives are interest-rate swap agreements, which are used as part of its asset and liability management strategy to
help manage its interest rate risk position. The Company does not use derivatives for trading or balance sheet
hedging purposes. The derivative transactions are considered instruments with no hedging designation, otherwise
known as stand-alone derivatives. Changes in the fair value of the derivatives are reported currently in earnings, as
other noninterest income.
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Concentration of Credit Risk: There are no significant concentrations of loans to any one industry or customer.
However, most of the Company’s business activity is with customers located within Northeastern Ohio. Therefore,
the Company’s exposure to credit risk is significantly affected by changes in the economy of a nine county area.
Loans secured by real estate represent 69.8% of the total portfolio and changes related to the real estate markets are
monitored by management.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred loan
losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. The allowance is
based on management’s judgment taking into consideration past loss experience, reviews of individual loans, current
economic conditions and other factors considered relevant by management at the financial statement date. While
management uses the best information available to establish the allowance, future adjustments to the allowance may
be necessary, which may be material, if economic conditions differ substantially from the assumptions used in
estimating the allowance. If additions to the original estimate of the allowance for loan losses are deemed
necessary, they will be reported in earnings in the period in which they become reasonably estimable and probable.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that,
in management’s judgment, should be charged-off.
Acquired loans are individually evaluated and for those purchased loans without evidence of credit deterioration,
management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the
date of acquisition. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have
characteristics similar to the characteristics of the acquired portfolio of purchased loans. The grade for each
purchased loan without evidence of credit deterioration is reviewed subsequent to the date of acquisition any time a
loan is renewed or extended or at any time information becomes available to the Company that provides material
insight regarding the loan’s performance, the status of the borrower or the quality or value of the underlying
collateral. To the extent that current information indicates it is probable that the Company will collect all amounts
according to the contractual terms thereof, such loan is not considered impaired and is not individually considered in
the determination of the required allowance for loan losses. To the extent that current information indicates it is
probable that the Company will not be able to collect all amounts according to the contractual terms thereof, such
loan is considered impaired and is considered in the determination of the required level of allowance.
In determining the day one fair values of purchased loans without evidence of credit deterioration at the date of
acquisition, management includes (i) no carry-over of any previously recorded allowance for loan losses and (ii) an
adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and
grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective
yield method, over the remaining life of each loan.
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. A loan is considered impaired when, based on the current information and
events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified,
and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and
classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
57
Impairment is measured on a loan by loan basis for commercial and commercial real estate loans over $750
thousand, individually or in the aggregate, by either the present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans, such as consumer and residential real
estate loans are collectively evaluated for impairment and accordingly, they are not separately identified for
impairment disclosures. Non-real estate secured consumer loans in bankruptcy where debt has not been reaffirmed
are considered troubled debt restructurings and are evaluated individually to ensure that accurate accounting
treatment is in place.
The Company considers the guidance on troubled debt restructuring for individual consumer and residential loans
when evaluating for impairment disclosure. Troubled debt restructurings are measured at the present value of
estimated future cash flow using the loan’s effective rate at inception. If a troubled debt restructuring is considered
to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt
restructurings that subsequently default, the Company determines the amount of reserve in accordance with the
accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current
factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history
experienced for the most recent twelve quarters. The formula for calculating the allowance for loan losses requires
that the historical loss percentage be applied to homogeneous and all risk rated loans. This actual loss experience is
supplemented with other economic factors based on the risks present for each portfolio segment. These economic
factors include consideration of the following: levels of and trends in delinquencies and impaired loans; trends in
volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in
lending policies, procedures and practices; experience, ability and depth of lending management and other relevant
staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit
concentrations. The following portfolio segments have been identified:
Commercial Loans. Commercial credit is extended to commercial customers for use in normal business operations
to finance working capital needs, equipment purchases or other projects. The majority of these borrowers are
customers doing business within our geographic regions. These loans are generally underwritten individually and
secured with the assets of the company and the personal guarantee of the business owners. Commercial loans are
made based primarily on the historical and projected cash flow of the borrower and the underlying collateral
provided by the borrower.
Commercial Real Estate Loans. Commercial real estate loans are subject to underwriting standards and processes
similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans
is largely dependent on the successful operation of the property. Loan performance may be adversely affected by
factors impacting the general economy or conditions specific to the real estate market such as geographic location
and property type.
Consumer Loans. Consumer loans are primarily comprised of loans made directly to consumers and indirectly
through automobile dealerships. These loans have a specific matrix which consists of several factors including debt
to income, type of collateral and loan to collateral value, credit history and relationship with the borrower.
Consumer lending uses risk-based pricing in the underwriting process.
Residential Real Estate Loans. Residential mortgage loans represent loans to consumers for the purchase or
refinance of a residence. These loans are generally financed up to 15 years and in most cases, are extended to
borrowers to finance their primary residence. Real estate market values at the time of origination directly affect the
amount of credit extended and, in the event of default, subsequent changes in these values may impact the severity
of losses.
Servicing Rights: When mortgage loans are sold and servicing rights are retained, the servicing rights are initially
recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on
market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation
model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service,
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the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates
and losses. The Company compares the valuation model inputs and results to published industry data to validate the
model results and assumptions. All classes of servicing assets are subsequently measured using the amortization
method which requires servicing rights to be amortized into non-interest income in proportion to, and over the
period of, the estimated future net servicing income of the underlying loans.
All classes of servicing assets are subsequently measured using the amortization method which requires servicing
rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net
servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of
the assets compared to carrying amount. Any impairment is reported as a valuation allowance, to the extent that fair
value is less than the capitalized amount for a grouping. There was no valuation allowance impairment against
servicing assets as of December 31, 2017 or 2016.
Servicing fee income is recorded when earned for servicing loans based on a contractual percentage of the
outstanding principal or a fixed amount per loan. The amortization of mortgage servicing rights is netted against
loan servicing fee income. Servicing fees, late fees and ancillary fees related to loan servicing are not considered
significant for financial reporting.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less
costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of
cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance
is recorded through expense. These assets are recorded in other assets on the balance sheets as other real estate
owned (“OREO”). OREO totaled $171 thousand at December 31, 2017 and $482 thousand at December 31, 2016.
Operating costs after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated
depreciation. Buildings and related components are depreciated using the straight-line method with useful lives
ranging from 5 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with
useful lives ranging from 3 to 10 years.
Restricted Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank is also a
member of and owns stock in the Federal Reserve Bank. These stocks are carried at cost, classified as restricted
securities included in other assets, and periodically evaluated for impairment based on ultimate recovery of par
value. Restricted stock totaled $10.5 million at December 31, 2017 and $9.6 million at December 31, 2016. Both
cash and stock dividends are reported as income.
Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key officers. Bank
owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet
date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at
settlement.
Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets
are recorded at fair value.
Goodwill and Other Intangible Assets: Goodwill resulting from a business combination is generally determined as
the excess of the fair value of the consideration transferred over the fair value of the net assets acquired as of the
acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful
life is not amortized, but tested for impairment at least annually. The Company has selected September 30 as the
date to perform the annual goodwill impairment tests associated with the acquisition of the Trust, NAI, First
National Bank, FNCB, Bowers and Monitor. Intangible assets with definite useful lives are amortized over their
estimated useful lives. Goodwill is the only intangible asset with an indefinite life on the balance sheet. Core
deposit intangible assets arising from bank acquisitions are amortized over their estimated useful lives of 7 to 8
years. Non-compete contracts are amortized on a straight line basis, over the term of the agreements. Customer
relationship and trade name intangibles are amortized over a range of 13 to 15 years on an accelerated method.
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Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees,
based on the fair value of these awards at the date of grant. The market price of the Company’s common stock at
the grant date is used for restricted stock awards. Compensation cost is recognized over the required service period,
generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the entire award.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching and discretionary
contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of
service.
Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per common share include the dilutive
effect of additional potential common shares issuable under stock equity awards. Earnings and dividends per share
are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss).
Other comprehensive income (loss) consists of unrealized gains and losses on securities available for sale and
changes in the funded status of the post-retirement health plan, which are recognized as separate components of
equity, net of tax effects.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there are any matters currently that will have a material effect
on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank (“FRB”) was required to meet
regulatory reserve and clearing requirements. The Company had deposits with the FRB of $30.0 million at
December 31, 2017 and $16.4 million at December 31, 2016.
Equity: Treasury stock is carried at cost.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends
paid by the Bank and Trust to the holding company or by the holding company to shareholders.
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Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market
information and other assumptions as more fully disclosed in Note 6. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly
affect these estimates.
Operating Segments: Operations are managed and financial performance is primarily aggregated and reported in
three lines of business, the Bank, Trust and Retirement Consulting segments. The Company discloses segment
information in Note 21.
Adoption of New Accounting Standards and Newly Issued, Not Yet Effective Accounting Standards: During
February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220)
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this
Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects
and will improve the usefulness of information reported to financial statement users. However, because the
amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the guidance
that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not
affected. The standard takes effect for all entities for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2018. Early adoption of the amendments in this Update is permitted for public
business entities for reporting periods for which financial statements have not yet been issued and for all other
entities for reporting periods for which financial statements have not yet been made available for issuance. The
Company early adopted this ASU and the result was a reclass of $106 thousand from accumulated other
comprehensive income to retained earnings and is reflected in the Consolidated Financial Statements as of
December 31, 2017.
During April of 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable Debt Securities. Under current U.S. GAAP, a premium is
typically amortized to the maturity date when a callable debt security is purchased at a premium, even if the holder
is certain the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a
premium, the unamortized premium is recorded as a loss in earnings. The new standard shortens the amortization
period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a
premium or a discount with the economics of the underlying instrument. The standard takes effect for public
business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.
The Company does not plan to early adopt this ASU, which is permitted, including adoption in an interim period.
The Company does not expect the adoption of this ASU to have a material impact on its Consolidated Financial
Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the
new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and
interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company does not plan on early adoption of this ASU. The adoption of this guidance is not expected to have an
impact on the Company's Consolidated Financial Statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13: Financial Instruments-
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an
organization to measure all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions and reasonable and supportable forecasts. Financial institutions and other
organizations will now use forward-looking information to better inform their credit loss estimates. Many of the
loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change
to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which
loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for
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credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU
2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim
periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to
retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company
has begun to accumulate historical credit information, established an internal committee and engaged a software
provider in preparation for testing of the systems during 2019. Adoption of ASU 2016-13 will happen on January 1,
2020. Management has not determined the full impact the new standard will have on the Consolidated Financial
Statements.
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09: Compensation – Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in
ASU 2016-09 simplify several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in
the statement of cash flows. ASU 2016-09 is effective for public companies for interim and annual reporting
periods beginning after December 15, 2016, with early adoption permitted. The Company adopted the ASU 2016-
09 on January 1, 2017 which had no material impact on its Consolidated Financial Statements and disclosures.
In February 2016, FASB issued ASU 2016-02 (Topic 842): Leases. The main objective of ASU 2016-02 is to
provide users with useful, transparent and complete information about leasing transactions. ASU 2016-02 requires
the rights and obligations associated with leasing arrangements be reflected on the balance sheet to increase
transparency and comparability among organizations. Under the updated guidance, lessees will be required to
recognize a right-to-use asset and a liability to make a lease payment and disclose key information about leasing
arrangements. ASU 2016-02 is effective for public companies for interim and annual reporting periods beginning
after December 15, 2018, with early adoption permitted. The Company will adopt this ASU when required. As
disclosed in footnote 7, certain leases that the Company has in place could require the capitalization of $2.9 million
on the balance sheet as an asset and a related liability in the same amount with no income statement effect.
Therefore the Company does not expect the adoption of this ASU to have a material impact to its Consolidated
Financial Statements.
In January 2016, FASB issued ASU 2016-01: Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The main objective of ASU 2016-01 is to enhance the
reporting model for financial instruments to provide users of financial statements with more decision-useful
information. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) require equity
investments (except those accounted for under the equity method of accounting or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplify the
impairment assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identify impairment; 3) require public business entities to use the exit price notion when measuring
the fair value of financial instruments for disclosure purposes; and 4) require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. The
amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company adopted this ASU 2016-01 on January 1, 2018 and realized no
material impact on its Consolidated Financial Statements.
In May 2014, FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The ASU creates a
new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with
customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core
principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative
information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within
those annual periods, beginning after December 15, 2017. The new guidance will be effective for the Company's
year ending December 31, 2018 and has been adopted as of January 1, 2018. The use of the modified retrospective
approach will be used for implementing this standard. Interest income is outside of the scope of the new standard
and will not be impacted by the adoption of the standard. A review of the Company’s noninterest income has not
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resulted in a change in revenue recognition since adoption, nor is it expected to change revenue recognition
prospectively in a significant way.
NOTE 2 - BUSINESS COMBINATIONS
On August 15, 2017, the Company completed the acquisition of Monitor Bancorp, Inc. (“Monitor”), the holding
company of Monitor Bank. The transaction involved both cash and 465,787 shares of stock totaling $7.5 million.
Pursuant to the terms of the merger agreement, common shareholders of Monitor were entitled to elect to receive
consideration in cash or in common shares, without par value, of the Farmers National Banc Corp., subject to an
overall limitation of 85% of the Monitor common shares being exchanged for Farmers common shares and 15%
exchanged for cash. The per share cash consideration of $769.38 was equal to Monitor’s March 31 tangible book
value multiplied by 1.25. Based on the volume weighted average closing price of Farmers common shares for the
20 trading days ended August 11, 2017 of $14.04, the final stock exchange ratio was 54.80, resulting in an implied
value per Monitor common share of $769.38.
Goodwill of $1.0 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of
synergies and the cost savings resulting from the combining of the companies. The goodwill was determined not to
be deductible for income tax purposes. The fair value of other intangible assets of $673 thousand is related to core
deposits.
The following table summarizes the consideration paid for Monitor and the amounts of the assets acquired and
liabilities assumed on the closing date of the acquisition.
Consideration
Cash ........................................................................................................................................ $
Stock .......................................................................................................................................
Fair value of total consideration transferred ................................................................................ $
Fair value of assets acquired
Cash and due from financial institutions ................................................................................ $
Securities available for sale ....................................................................................................
Loans, net ...............................................................................................................................
Premises and equipment .........................................................................................................
Core deposit intangible...........................................................................................................
Other assets.............................................................................................................................
Total assets acquired............................................................................................................
Fair value of liabilities assumed
Deposits ..................................................................................................................................
Accrued interest payable and other liabilities ........................................................................
Total liabilities .....................................................................................................................
Net assets acquired .............................................................................................................. $
Goodwill created ....................................................................................................................
Total net assets acquired...................................................................................................... $
1,154
6,358
7,512
17,673
3,057
19,315
192
673
272
41,182
34,586
121
34,707
6,475
1,037
7,512
Valuation of some assets acquired or created including but not limited to net loans and goodwill are preliminary and
could be subject to change. Any changes are not expected to be material.
On June 1, 2016, the Bank completed the acquisition of the Bowers, and merged all activity of Bowers with
Insurance, the Bank’s wholly-owned insurance agency subsidiary. The Bowers group is engaged in selling
insurance, including commercial, farm, home, and auto property/casualty insurance and will help to meet the needs
of all the Company’s customers. The transaction involved both cash and 123,280 shares of stock totaling $3.2
million, including up to $1.2 million of future payments, contingent upon Bowers meeting performance targets, with
an estimated fair value at the acquisition date of $880 thousand. The first of three contingent payments were made
during 2017, totaling $316 thousand, which reduced the earnout payable to $564 thousand. Subsequent to the
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payment, management conducted a valuation of the contingent consideration and found it necessary to reduce the
future payment liability associated with the remaining two payments down to $200 thousand at year end 2017. The
$364 thousand was recorded as a reduction to acquisition related costs in the current year on the Consolidated
Statements of Income as of December 31, 2017. The Company conducts this valuation work annually. The
acquisition is part of the Company’s plan to increase the levels of noninterest income and to complement the
existing insurance services currently being offered.
Goodwill of $1.8 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of
synergies and the cost savings resulting from the combining of the companies. The goodwill was determined not to
be deductible for income tax purposes. The fair value of other intangible assets of $1.6 million is related to client
relationships, company name and noncompetition agreements.
The following table summarizes the consideration paid for Bowers and the amounts of the assets acquired and
liabilities assumed on the closing date of the acquisition.
Consideration
Cash ........................................................................................................................................ $
Stock .......................................................................................................................................
Contingent consideration........................................................................................................
Fair value of total consideration transferred ................................................................................ $
Fair value of assets acquired
Cash ........................................................................................................................................ $
Premises and equipment .........................................................................................................
Other assets.............................................................................................................................
Total assets...........................................................................................................................
Fair value of liabilities assumed ..................................................................................................
Net assets acquired .............................................................................................................. $
Assets and liabilities arising from acquisition
Identified intangible assets .....................................................................................................
Deferred tax liability ..............................................................................................................
Goodwill created ....................................................................................................................
Total net assets acquired...................................................................................................... $
1,137
1,138
880
3,155
64
290
34
388
124
264
1,630
(588)
1,849
3,155
The following table presents pro forma information as if the above acquisitions that occurred in 2016 and 2017
actually took place at the beginning of 2016. The pro forma information includes adjustments for merger related
costs, amortization of intangibles arising from the transaction and the related income tax effects. The pro forma
financial information is not necessarily indicative of the results of operations that would have occurred had the
transactions been effective on the assumed date.
Net interest income........................................................................................ $
2017
74,409 $
2016
69,341
Net income..................................................................................................... $
22,776 $
20,661
Basic and diluted earnings per share ............................................................. $
0.83 $
0.77
On October 1, 2015, the Company completed the acquisition of Tri-State, the parent company of FNCB. The
transaction involved both cash and 1,296,517 shares of stock totaling $14.3 million. Pursuant to the terms of the
merger agreement, common shareholders of Tri-State received 1.747 common shares, without par value, of the
Company or $14.20 in cash, for each common share of Tri-State, subject to proration provisions specified in the
merger agreement that provide for a targeted aggregate split of total consideration consisting of 75% shares of
64
Farmers’ common stock and 25% cash. Preferred shareholders of Tri-State received $13.60 in cash for each share
of Series A Preferred Stock, without par value, of Tri-State.
Goodwill of $3.0 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of
synergies and the cost savings resulting from the combining of the companies. The goodwill was determined not to
be deductible for income tax purposes. The fair value of other intangible assets of $1.2 million is related to core
deposits.
On June 19, 2015, the Company completed the acquisition of all outstanding stock of NBOH, the parent company of
First National Bank of Orrville. The transaction involved both cash and 7,262,955 shares of stock totaling $74.8
million. First National Bank of Orrville branches became branches of Farmers Bank. Pursuant to the Agreement,
each shareholder of NBOH received either $32.15 per share in cash or 4.034 shares of Farmers’ common stock,
subject to an overall limitation of 80% of the shares of NBOH being exchanged for stock and 20% for cash.
Goodwill of $26.7 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of
synergies and the cost savings resulting from the combining of the companies. The goodwill was determined not to
be deductible for income tax purposes. The fair value of other intangible assets of $4.4 million is related to core
deposits.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at
December 31, 2017 and 2016 and the corresponding amounts of gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) were as follows:
2017
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair Value
U.S. Treasury and U.S. government sponsored
entities ....................................................................... $
State and political subdivisions....................................
Corporate bonds ...........................................................
Mortgage-backed securities - residential .....................
Collateralized mortgage obligations ............................
Small Business Administration....................................
Equity securities...........................................................
Totals............................................................................ $
8,986 $
188,032
1,238
161,635
17,898
14,608
179
392,576 $
0 $
3,614
4
419
0
0
216
4,253 $
(69) $
(643)
(8)
(1,604)
(777)
(396)
(1)
(3,498) $
8,917
191,003
1,234
160,450
17,121
14,212
394
393,331
2016
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair Value
U.S. Treasury and U.S. government sponsored
entities ....................................................................... $
State and political subdivisions....................................
Corporate bonds ...........................................................
Mortgage-backed securities - residential .....................
Collateralized mortgage obligations ............................
Small Business Administration....................................
Equity securities...........................................................
Totals............................................................................ $
5,970 $
157,014
1,343
171,215
21,397
17,236
168
374,343 $
5 $
1,049
4
1,019
1
0
185
2,263 $
(54) $
(2,760)
(8)
(2,552)
(705)
(530)
(2)
(6,611) $
5,921
155,303
1,339
169,682
20,693
16,706
351
369,995
65
The proceeds from sales of available-for-sale securities and the associated gains and losses were as follows:
Proceeds ................................................................................................ $
Gross gains ............................................................................................
Gross losses ...........................................................................................
2017
54,497 $
727
(723)
2016
11,493 $
389
(316)
2015
102,257
908
(814)
The tax provision related to these net realized gains was $2 thousand, $26 thousand and $33 thousand respectively.
The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected
maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or
without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Available for sale
Maturity
Within one year ............................................................................................................ $
One to five years...........................................................................................................
Five to ten years............................................................................................................
Beyond ten years ..........................................................................................................
Mortgage-backed securities, collateralized mortgage obligations and
Small Business Administration .................................................................................
Totals....................................................................................................................... $
December 31, 2017
Amortized
Cost
Fair Value
19,030
47,585
121,866
12,673
19,061 $
47,277
119,195
12,723
194,141
392,397 $
191,783
392,937
Securities with a carrying amount of $269 million at December 31, 2017 and $242 million at December 31, 2016
were pledged to secure public deposits and repurchase agreements. Trust had securities, with a carrying amount of
$100 thousand, at year-end 2017 and 2016, pledged to qualify as a fiduciary in the State of Ohio.
In each year, there were no holdings of any other issuer that exceeded 10% of stockholders’ equity, other than the
U.S. Government, its agencies and its sponsored entities.
The following table summarizes the investment securities with unrealized losses at December 31, 2017 and 2016
aggregated by major security type and length of time in a continuous unrealized loss position.
2017
Description of Securities
Less than 12 Months 12 Months or More
Fair
Value
Unrealized Fair
Value
Loss
Loss
Unrealized Fair
Value
Total
Unrealized
Loss
U.S. Treasury and U.S. government
sponsored entities ....................................... $ 3,970 $
State and political subdivisions .................. 33,188
Corporate bonds .........................................
397
Mortgage-backed securities - residential.... 40,072
1,701
Collateralized mortgage obligations...........
0
Small Business Administration ..................
22
Equity securities .........................................
Total temporarily impaired ................... $ 79,350 $
(3)
1,912 $
(34) $
(220) 25,721
383
(400) 53,760
(22) 15,420
0 14,182
0
(1)
(680) $111,378 $
66
(5)
5,882 $
(35) $
(423) 58,909
780
(1,204) 93,832
(755) 17,121
(396) 14,182
22
(2,818) $190,728 $
0
(69)
(643)
(8)
(1,604)
(777)
(396)
(1)
(3,498)
2016
Description of Securities
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized Fair
Unrealized Fair
Loss
Value
Loss
Value
Unrealized
Loss
U.S. Treasury and U.S. government
sponsored entities ....................................... $
4,015 $
State and political subdivisions .................. 92,560
Corporate bonds .........................................
786
Mortgage-backed securities - residential.... 98,348
7,956
Collateralized mortgage obligations...........
8,770
Small Business Administration ..................
44
Equity securities .........................................
Total temporarily impaired ................... $212,479 $
(54) $
(2,745)
(8)
502 $
286
0
(1,823) 29,743
(108) 10,972
7,890
(205)
0
(2)
(4,945) $ 49,393 $
0
0 $
4,517 $
(15) 92,846
786
(729) 128,091
(597) 18,928
(325) 16,660
44
(1,666) $261,872 $
0
(54)
(2,760)
(8)
(2,552)
(705)
(530)
(2)
(6,611)
The Company’s equity securities include local and regional bank holdings. No other-than-temporary impairments
were recognized during 2017, 2016 or 2015. If an other-than-temporary impairment were to occur, the amount of
the impairment recognized in earnings depends on whether an entity intends to sell the security or it is more likely
than not it would be required to sell the security before recovery of its amortized cost basis. The previous amortized
cost basis less the impairment recognized in earnings becomes the new amortized cost basis of the investment.
As of December 31, 2017, the Company’s security portfolio consisted of 550 securities, 184 of which were in an
unrealized loss position. The majority of unrealized losses are related to the Company’s holdings in securities
issued by state and political subdivisions, mortgage-backed securities - residential, collateralized mortgage
obligations and Small Business Administration, as discussed below:
Securities issued by State and Political subdivisions
Unrealized losses on debt securities issued by state and political subdivisions have not been recognized into income.
At December 31, 2017 and 2016 all securities issued by state and political subdivisions have investment grade
ratings and management does not have the intent and does not expect to be required to sell these securities before
their anticipated recovery. The fair value is expected to recover as the securities approach their maturity date.
Mortgage-backed securities - residential
All of the Company’s holdings of mortgage-backed securities—residential at year end 2017 and 2016 were issued
by U.S. Government sponsored enterprises. Unrealized losses on mortgage-backed securities—residential have not
been recognized into income. Because the decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company does not have the intent to sell these mortgage-backed securities—
residential and it is likely that it will not be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired at December 31, 2017 and 2016.
Collateralized mortgage obligations
The Company’s portfolio includes collateralized mortgage obligations issued by U.S. Government sponsored
enterprises. The decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality.
The Company does not have the intent to sell these collateralized mortgage obligations and it is likely that it will not
be required to sell the securities before their anticipated recovery. The Company monitors all securities to ensure
adequate credit support and as of December 31, 2017 and 2016, the Company believes there is no other-than-
temporary impairment.
67
Small Business Administration
The Company’s holdings of Small Business Administration securities are issued and backed by the full faith and
credit of the U.S. Government. Unrealized losses on these Small Business Administration securities have not been
recognized into income. The Company does not consider these securities to be other-than-temporarily impaired at
December 31, 2017 and 2016 because the decline in fair value is attributable to changes in interest rates and
illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely
that it will not be required to sell the securities before their anticipated recovery.
NOTE 4 - LOANS
Loans at year end were as follows:
Originated loans:
Commercial real estate
2017
2016
Owner occupied........................................................................................................ $
Non-owner occupied ................................................................................................
Farmland...................................................................................................................
Other .........................................................................................................................
140,321 $
199,080
70,534
89,025
109,750
165,861
34,155
70,823
Commercial
Commercial and industrial .......................................................................................
Agricultural...............................................................................................................
193,347
32,587
171,145
24,598
Residential real estate
1-4 family residential................................................................................................
Home equity lines of credit ......................................................................................
272,421
71,507
224,222
59,642
Consumer
Indirect......................................................................................................................
Direct ........................................................................................................................
Other .........................................................................................................................
Total originated loans....................................................................................... $
155,950
28,519
8,876
1,262,167 $
156,633
26,663
7,611
1,051,103
Acquired loans:
Commercial real estate
Owner occupied........................................................................................................ $
Non-owner occupied ................................................................................................
Farmland...................................................................................................................
Other .........................................................................................................................
53,031 $
20,286
47,754
11,964
Commercial
Commercial and industrial .......................................................................................
Agricultural...............................................................................................................
27,094
12,206
Residential real estate
60,928
24,949
54,204
14,665
33,626
16,024
1-4 family residential................................................................................................
Home equity lines of credit ......................................................................................
96,759
28,755
112,015
34,795
Consumer
Direct ........................................................................................................................
Other .........................................................................................................................
Total acquired loans ............................................................................................
Net deferred loan costs...................................................................................................
Allowance for loan losses ..............................................................................................
Net loans ........................................................................................................ $
14,378
128
312,355
2,859
(12,315)
1,565,066 $
21,681
247
373,134
3,398
(10,852)
1,416,783
68
Purchased credit impaired loans
As part of the NBOH acquisition in 2015 the Company acquired various loans that displayed evidence of
deterioration of credit quality since origination and which was probable that all contractually required payments
would not be collected. The carrying amounts and contractually required payments of these loans which are
included in the loan balances above are summarized in the following tables:
Commercial real estate
Owner occupied ................................................................................................... $
Non-owner occupied ............................................................................................
Commercial
Commercial and industrial ...................................................................................
Total outstanding balance............................................................................... $
Carrying amount, net of allowance of $0 in 2017 and 2016..................... $
Accretable yield, or income expected to be collected, is shown in the table below:
Beginning balance...................................................................................................... $
New loans purchased ............................................................................................
Accretion of income .............................................................................................
Ending balance........................................................................................................... $
2017
2016
$
670
387
1,072
2,129
1,733
$
$
2017
247 $
0
(77)
170 $
689
436
1,213
2,338
2,181
2016
323
0
(76)
247
The key assumptions considered include probability of default and the amount of actual prepayments after the
acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income
and principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are
adjusted as necessary. There were no adjustments to forecasted cash flows that impacted the allowance for loan
losses for the years ended December 31, 2017 and 2016.
The following tables present the activity in the allowance for loan losses by portfolio segment for years ended
December 31, 2017, 2016 and 2015:
December 31, 2017
Allowance for loan losses
Commercial
Real Estate Commercial
Residential
Real Estate Consumer Unallocated Total
Beginning balance ............................... $
Provision for loan losses......................
Loans charged off ................................
Recoveries ...........................................
Total ending allowance balance ................ $
3,577 $
298
(207)
592
4,260 $
1,874 $
446
(375)
66
2,011 $
2,205 $
378
(162)
100
2,521 $
2,766 $
1,983
(2,542)
641
2,848 $
430 $10,852
245 3,350
0 (3,286)
0 1,399
675 $12,315
December 31, 2016
Allowance for loan losses
Commercial
Real Estate Commercial
Residential
Real Estate Consumer Unallocated Total
Beginning balance .............................. $
Provision for loan losses.....................
Loans charged off ...............................
Recoveries ..........................................
Total ending allowance balance............... $
3,127 $
784
(349)
15
3,577 $
1,373 $
701
(245)
45
1,874 $
1,845 $
436
(188)
112
2,205 $
2,160 $
1,992
(2,019)
633
2,766 $
473 $ 8,978
(43) 3,870
0 (2,801)
805
0
430 $10,852
69
December 31, 2015
Allowance for loan losses
Commercial
Real Estate Commercial
Residential
Real Estate Consumer Unallocated Total
Beginning balance................................ $
Provision for loan losses ......................
Loans charged off.................................
Recoveries............................................
Total ending allowance balance ................ $
2,676 $
857
(536)
130
3,127 $
1,420 $
234
(290)
9
1,373 $
1,689 $
354
(320)
122
1,845 $
1,663 $
1,776
(2,058)
779
2,160 $
184 $ 7,632
289 3,510
0 (3,204)
0 1,040
473 $ 8,978
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by
portfolio segment, based on impairment method as of December 31, 2017 and 2016. The recorded investment in
loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued
interest receivable which is not considered to be material:
December 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to
loans:
Commercial
Real Estate Commercial
Residential
Real Estate Consumer Unallocated Total
$
Individually evaluated for
impairment ........................................
Collectively evaluated for
impairment ........................................
Acquired loans collectively
evaluated for impairment ..................
Acquired with deteriorated credit
quality................................................
Total ending allowance balance ................ $
Loans:
$
Loans individually evaluated for
impairment ........................................
Loans collectively evaluated for
impairment ........................................
Acquired loans .....................................
Acquired with deteriorated credit
quality................................................
Total ending loans balance ........................ $
0 $
4 $
158 $
0 $
0 $
162
4,214
1,993
2,322
2,844
675
12,048
46
14
41
4
0
105
0
4,260 $
0
2,011 $
0
2,521 $
0
2,848 $
0
675 $
0
12,315
658 $
260 $
4,559 $
59 $
0 $
5,536
0 1,259,993
310,118
0
0
1,734
0 $1,577,381
497,168
131,926
225,312
38,503
339,143 198,370
14,507
125,182
786
0
264,861 $ 468,884 $ 212,936 $
0
948
630,700 $
70
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to
loans:
Commercial
Real Estate Commercial
Residential
Real Estate Consumer Unallocated Total
Individually evaluated for
impairment ........................................ $
Collectively evaluated for
impairment ........................................
Acquired loans collectively
evaluated for impairment ..................
Acquired with deteriorated credit
quality................................................
Total ending allowance balance ................ $
Loans:
$
Loans individually evaluated for
impairment ........................................
Loans collectively evaluated for
impairment ........................................
Acquired loans .....................................
Acquired with deteriorated credit
quality................................................
Total ending loans balance ........................ $
86 $
111 $
52 $
0 $
0 $
249
3,491
1,763
2,153
2,766
430
10,603
0
0
0
0
0
0
0
3,577 $
0
1,874 $
0
2,205 $
0
2,766 $
0
430 $
0
10,852
3,457 $
477 $
3,308 $
96 $
0 $
7,338
0 1,048,074
370,359
0
0
1,864
0 $1,427,635
376,632
153,228
195,146
48,536
280,215 196,081
21,923
146,672
896
0
245,055 $ 430,195 $ 218,100 $
0
968
534,285 $
71
The following tables present information related to impaired loans by class of loans as of and for years ended
December 31, 2017, 2016 and 2015. The recorded investment in loans excludes accrued interest receivable due to
immateriality.
December 31, 2017
With no related allowance recorded:
Unpaid Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
Average Recorded
Investment
Interest Income
Recognized
Commercial real estate
Owner occupied..................... $
Non-owner occupied .............
Farmland................................
Commercial
Commercial and industrial .......
Agricultural ..............................
Residential real estate
1-4 family residential.............
Home equity lines of credit ...
Consumer ....................................
Subtotal .......................................
With an allowance recorded:
Commercial real estate
Owner occupied.....................
Non-owner occupied .............
Farmland................................
Commercial
Commercial and industrial ....
Agricultural ...........................
Residential real estate
1-4 family residential.............
Home equity lines of credit ...
Consumer ....................................
Subtotal .......................................
Total ................................................. $
659 $
0
0
214
0
658 $
0
0
192
0
2,923
341
145
4,282
2,697
319
59
3,925
0
0
0
68
0
0
0
0
68
0
0 $
0
0
0
0
0
0
0
0
0
0
0
4
0
1,409
159
0
1,636
5,918 $
1,387
156
0
1,611
5,536 $
84
74
0
162
162 $
767 $
68
12
184
10
2,343
299
74
3,757
134
640
63
71
50
837
95
2
1,892
5,649 $
10
2
0
4
0
138
15
11
180
6
28
0
4
0
29
3
0
70
250
72
December 31, 2016
With no related allowance recorded:
Unpaid Principal
Balance
Commercial real estate
Recorded
Investment
Allowance for
Loan Losses
Allocated
Average Recorded
Investment
Interest Income
Recognized
Owner occupied..................... $
Non-owner occupied .............
1,974 $
332
1,456 $
331
Commercial
Commercial and industrial ....
205
184
Residential real estate
1-4 family residential.............
Home equity lines of credit ...
Consumer ....................................
Subtotal .......................................
With an allowance recorded:
Commercial real estate
Owner occupied.....................
Non-owner occupied .............
Farmland................................
Commercial
Commercial and industrial ....
Agricultural ...........................
Residential real estate
1-4 family residential.............
Home equity lines of credit ...
Consumer ....................................
Subtotal .......................................
Total ................................................. $
2,650
195
205
5,561
173
1,118
380
75
219
661
84
0
2,710
8,271 $
2,403
179
96
4,649
173
1,118
379
75
218
642
84
0
2,689
7,338 $
0 $
0
0
0
0
0
0
14
30
42
4
107
51
1
0
249
249 $
1,601 $
334
641
2,302
221
97
5,196
874
1,283
127
103
73
828
85
1
3,374
8,570 $
70
5
15
145
10
13
258
29
67
0
4
0
36
4
0
140
398
73
December 31, 2015
With no related allowance recorded:
Unpaid Principal
Balance
Commercial real estate
Recorded
Investment
Allowance for
Loan Losses
Allocated
Average Recorded
Investment
Interest Income
Recognized
Owner occupied..................... $
Non-owner occupied .............
2,956 $
343
2,436 $
342
Commercial
Commercial and industrial ....
834
631
Residential real estate
1-4 family residential.............
Home equity lines of credit ...
Consumer ....................................
Subtotal .......................................
With an allowance recorded:
Commercial real estate
2,575
283
214
7,205
2,310
268
103
6,090
Owner occupied.....................
Non-owner occupied .............
1,597
1,480
1,595
1,480
Commercial
Commercial and industrial ....
81
81
Residential real estate
1-4 family residential.............
Home equity lines of credit ...
Subtotal .......................................
Total ................................................. $
769
87
4,014
11,219 $
749
87
3,992
10,082 $
0 $
0
0
0
0
0
0
379
50
5
61
2
497
497 $
2,080 $
372
433
2,174
260
81
5,400
2,008
1,511
540
919
96
5,074
10,474 $
106
30
23
147
15
14
335
70
79
4
39
4
196
531
Cash basis interest income recognized and interest income recognized was materially equal for 2017, 2016 and 2015.
74
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that
are collectively evaluated for impairment and individually classified impaired loans. The following table presents
the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of
December 31, 2017 and 2016:
2017
2016
Loans Past Due
90 Days or More
Still Accruing
Nonaccrual
Loans Past Due
90 Days or More
Still Accruing
Nonaccrual
Originated loans:
Commercial real estate
Owner occupied...................................................... $
Non-owner occupied ..............................................
Farmland.................................................................
Commercial
Commercial and industrial .....................................
Agricultural ............................................................
Residential real estate
501 $
0
45
249
2
1-4 family residential..............................................
Home equity lines of credit ....................................
2,653
602
Consumer
Indirect....................................................................
Direct ......................................................................
Other .......................................................................
Total originated loans ....................................... $
457
63
0
4,572 $
Acquired loans:
Commercial real estate
Owner occupied...................................................... $
Non-owner occupied ..............................................
Other .......................................................................
Farmland.................................................................
Commercial
Commercial and industrial .....................................
Agricultural ............................................................
Residential real estate
1-4 family residential..............................................
Home equity lines of credit ....................................
Consumer
0 $
216
0
0
943
9
613
170
0 $
0
0
0
0
393
8
361
153
14
929 $
0 $
0
0
0
19
0
69
0
958 $
343
58
400
12
1,929
202
298
9
0
4,209 $
85 $
0
24
380
961
236
386
119
Direct ......................................................................
Total acquired loans .......................................... $
Total loans ................................................... $
140
2,091 $
6,663 $
15
103 $
1,032 $
89
2,280 $
6,489 $
0
0
0
0
0
295
118
438
65
16
932
0
0
0
0
0
0
545
109
95
749
1,681
75
The following tables present the aging of the recorded investment in past due loans as of December 31, 2017 and
2016 by class of loans:
December 31, 2017
Originated loans:
Commercial real estate
30-59
Days
Past
Due
60-89
Days
Past
Due
90 Days or More
Past Due
and Nonaccrual
Total
Past
Due
Loans Not
Past Due Total
Owner occupied.................................... $
Non-owner occupied ............................
Farmland...............................................
Other .....................................................
4 $
0
0
0
Commercial
Commercial and industrial ...................
Agricultural ..........................................
292
74
Residential real estate
340 $
0
0
0
3
0
501 $
0
45
0
249
2
845 $ 139,081 $ 139,926
198,588
70,443
88,703
198,588
70,398
88,703
0
45
0
544
76
192,335
32,605
192,879
32,681
1-4 family residential............................
Home equity lines of credit ..................
2,044
155
403
18
3,046
610
5,493
783
266,338
70,754
271,831
71,537
Consumer
Indirect..................................................
Direct ....................................................
Other .....................................................
2,429
632
115
829
250
11
$ 5,745 $ 1,854 $
Total originated loans:
Acquired loans:
Commercial real estate
818
216
14
160,848
28,706
8,876
5,501 $ 13,100 $1,251,918 $1,265,018
156,772
27,608
8,736
4,076
1,098
140
Owner occupied.................................... $
Non-owner occupied ............................
Farmland...............................................
Other .....................................................
Commercial
Commercial and industrial ...................
Agricultural ..........................................
Residential real estate
1-4 family residential............................
Home equity lines of credit ..................
Consumer
0 $
0
454
0
327
87
858
161
0 $
0
0
0
96
0
77
0
0 $
216
0
0
0 $
216
454
0
53,051 $
20,042
47,301
11,976
53,051
20,258
47,755
11,976
962
9
1,385
96
25,709
12,111
27,094
12,207
682
170
1,617
331
95,144
28,424
96,761
28,755
155
0
686
1
14,378
128
2,194 $ 4,786 $ 307,577 $ 312,363
7,695 $ 17,886 $1,559,495 $1,577,381
13,692
127
Direct ....................................................
Other .....................................................
380
0
Total acquired loans ........................ $ 2,267 $
151
1
325 $
Total loans ................................. $ 8,012 $ 2,179 $
76
December 31, 2016
Originated loans:
Commercial real estate
30-59
Days
Past
Due
60-89
Days
Past
Due
90 Days or More
Past Due
and Nonaccrual
Total
Past
Due
Loans Not
Past Due Total
Owner occupied.................................... $
Non-owner occupied ............................
Farmland...............................................
Other .....................................................
0 $
0
0
0
Commercial
Commercial and industrial ...................
Agricultural ..........................................
90
0
Residential real estate
1-4 family residential............................
Home equity lines of credit ..................
3,368
77
0 $
0
0
0
0
29
356
37
Consumer
958 $
343
58
0
400
12
958 $ 108,475 $ 109,433
165,448
343
34,115
58
70,542
0
165,105
34,057
70,542
490
41
170,242
24,632
170,732
24,673
2,224
320
5,948
434
217,752
59,248
223,700
59,682
Indirect..................................................
Direct ....................................................
Other .....................................................
2,844
744
92
696
213
28
$ 7,215 $ 1,359 $
Total originated loans:
Acquired loans:
Commercial real estate
736
74
16
161,713
26,846
7,612
5,141 $ 13,715 $1,040,781 $1,054,496
157,437
25,815
7,476
4,276
1,031
136
Owner occupied.................................... $
Non-owner occupied ............................
Farmland...............................................
Other .....................................................
Commercial
Commercial and industrial ...................
Agricultural ..........................................
Residential real estate
8 $
134
83
0
278
21
205 $
0
0
0
0
0
85 $
0
380
24
298 $
134
463
24
60,630 $
24,815
53,741
14,642
60,928
24,949
54,204
14,666
961
236
1,239
257
32,387
15,767
33,626
16,024
1-4 family residential............................
Home equity lines of credit ..................
1,556
152
504
9
931
228
2,991
389
109,027
34,406
112,018
34,795
Consumer
Direct ....................................................
Other .....................................................
938
100
Total acquired loans ........................ $ 3,270 $
184
0
902 $
Total loans ................................. $ 10,485 $ 2,261 $
184
0
1,306
100
21,682
247
3,029 $ 7,201 $ 365,938 $ 373,139
8,170 $ 20,916 $1,406,719 $1,427,635
20,376
147
Troubled Debt Restructurings:
Total troubled debt restructurings were $5.0 million and $7.0 million at December 31, 2017 and 2016 respectively.
The Company has allocated $68 thousand and $101 thousand of specific reserves to customers whose loan terms
have been modified in troubled debt restructurings as of December 31, 2017 and 2016, respectively. There were no
commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings
at December 31, 2017 and 2016.
During the years ending December 31, 2017, 2016 and 2015, the terms of certain loans were modified as troubled
debt restructurings. The modification of the terms of such loans included one or a combination of the following: a
reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower
than the current market rate for new debt with similar risk; a permanent increase of the recorded investment in the
loan due to a protective advance to pay delinquent real estate taxes or advance new monies; an extension of an
interest only period; a deferral of principal payments; or a legal concession.
77
Troubled debt restructuring modifications involved a reduction of the notes stated interest rate in the range of 0.49%
to 11.51%. There were also extensions of the maturity dates on these and other troubled debt restructurings in the
range of six months to 132 months.
The following tables present loans by class modified as troubled debt restructurings that occurred during the years
ending December 31, 2017, 2016 and 2015:
December 31, 2017
Troubled Debt Restructurings:
Originated loans:
Residential real estate
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Loans
1-4 family residential..............................................................
Home equity lines of credit ....................................................
Indirect .........................................................................................
Total originated loans........................................................
Acquired loans:
Commercial
Commercial and industrial......................................................
Residential real estate
1-4 family residential..............................................................
Home equity lines of credit ....................................................
Consumer .....................................................................................
Total acquired loans ..........................................................
Total loans ...................................................................
15
10
29
54
1
3
1
2
7
61
$
$
$
$
$
910
234
161
1,305
$
$
917
234
161
1,312
13
$
13
85
57
55
210
1,515
$
$
85
57
55
210
1,522
The troubled debt restructurings described above increased the allowance for loan losses by $75 thousand and
resulted in charge offs of $75 thousand during the year ended December 31, 2017.
December 31, 2016
Troubled Debt Restructurings:
Originated loans:
Residential real estate
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Loans
1-4 family residential..............................................................
Home equity lines of credit ....................................................
Indirect .........................................................................................
Consumer .....................................................................................
Total originated loans........................................................
Acquired loans:
Residential real estate
1-4 family residential..............................................................
Home equity lines of credit ....................................................
Consumer .....................................................................................
Total acquired loans ..........................................................
Total loans ...................................................................
15
1
26
2
44
4
1
2
7
51
$
$
$
$
436
40
182
12
670
153
18
40
211
881
$
$
$
$
437
40
182
12
671
153
18
40
211
882
78
The troubled debt restructurings described above increased the allowance for loan losses by $43 thousand and
resulted in charge offs of $344 thousand during the year ended December 31, 2016.
December 31, 2015
Troubled Debt Restructurings:
Originated loans:
Commercial real estate
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Loans
Owner occupied......................................................................
Commercial
Commercial and industrial......................................................
Residential real estate
1-4 family residential..............................................................
Home equity lines of credit ....................................................
Indirect .........................................................................................
Consumer .....................................................................................
Total originated loans........................................................
Acquired loans:
Commercial
Commercial and industrial......................................................
Total loans ...................................................................
2
1
13
2
12
1
31
2
33
$
801
$
801
8
760
60
104
8
1,741
957
2,698
$
$
8
760
60
104
8
1,741
957
2,698
$
$
The troubled debt restructurings described above increased the allowance for loan losses by $101 thousand and
resulted in charge offs of $129 thousand during the year ended December 31, 2015.
There were no loans for which there were payment defaults within twelve months following the modification of the
troubled debt restructuring during the year December 31, 2017. A loan is considered to be in payment default once
it is 30 days contractually past due under the modified terms.
There were two commercial real estate loans for $1.2 million, one residential real estate loan for $1 thousand and
one home equity line of credit for $10 thousand modified as troubled debt restructurings for which there were
payment defaults within twelve months following the modification during the year December 31, 2016. None of the
loans were past due at December 31, 2016. There was no effect on the provision for loan losses as a result of this
default during 2016.
There was one commercial real estate loan for $40 thousand, one residential real estate loan for $1 thousand and one
home equity line of credit for $11 thousand modified as troubled debt restructurings for which there were payment
defaults within twelve months following the modification during the year December 31, 2015. All three loans were
past due at December 31, 2015. There was no effect of the provision for loan losses as a result of this default during
2015.
79
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt such as: current financial information, historical payment experience, credit documentation, public
information and current economic trends, among other factors. The Company establishes a risk rating at origination
for all commercial loan and commercial real estate relationships. For relationships over $750 thousand management
monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management
also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis. The Company
uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s
close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not
adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility
that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard,
with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are
considered to be pass rated loans.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
December 31, 2017
Originated loans:
Commercial real estate
Pass
Special
Mention
Sub
standard
Total
Owner occupied....................................................... $
Non-owner occupied................................................
Farmland..................................................................
Other ........................................................................
137,913
198,043
70,354
88,421
Commercial
Commercial and industrial.......................................
Agricultural..............................................................
Total originated loans......................................... $
184,444
32,291
711,466
Acquired loans:
Commercial real estate
Owner occupied....................................................... $
Non-owner occupied................................................
Farmland..................................................................
Other ........................................................................
51,133
19,823
43,694
11,299
Commercial
Commercial and industrial.......................................
Agricultural..............................................................
Total acquired loans ........................................... $
Total loans .................................................... $
25,286
11,200
162,435
873,901
$
$
$
$
$
442
419
44
36
5,326
192
6,459
466
63
3,304
567
2
554
4,956
11,415
$
$
$
$
$
1,571
126
45
246
3,109
198
5,295
1,452
372
757
110
1,806
453
4,950
10,245
$
$
$
$
$
139,926
198,588
70,443
88,703
192,879
32,681
723,220
53,051
20,258
47,755
11,976
27,094
12,207
172,341
895,561
80
December 31, 2016
Originated loans:
Commercial real estate
Pass
Special
Mention
Sub
standard
Total
Owner occupied....................................................... $
Non-owner occupied................................................
Farmland..................................................................
Other ........................................................................
106,448
162,465
34,057
69,947
Commercial
Commercial and industrial.......................................
Agricultural..............................................................
Total originated loans......................................... $
167,062
24,395
564,374
Acquired loans:
Commercial real estate
Owner occupied....................................................... $
Non-owner occupied................................................
Farmland..................................................................
Other ........................................................................
58,655
23,577
53,039
14,060
Commercial
Commercial and industrial.......................................
Agricultural..............................................................
Total acquired loans ........................................... $
Total loans .................................................... $
30,543
14,856
194,730
759,104
$
$
$
$
$
490
522
0
325
2,720
253
4,310
707
1,195
0
464
311
685
3,362
7,672
$
$
$
$
$
2,495
2,461
58
270
950
25
6,259
1,566
177
1,165
142
2,772
483
6,305
12,564
$
$
$
$
$
109,433
165,448
34,115
70,542
170,732
24,673
574,943
60,928
24,949
54,204
14,666
33,626
16,024
204,397
779,340
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For
residential, consumer and indirect loan classes, the Company also evaluates credit quality based on the aging status
of the loan, which was previously presented, and by payment activity.
The following table presents the recorded investment in residential, consumer and indirect auto loans based on
payment activity. Nonperforming loans are loans past due 90 days and still accruing interest and nonaccrual loans.
Residential Real Estate
Consumer
December 31, 2017
Originated loans:
1-4 Family
Residential
Home Equity Lines
of Credit
Indirect
Direct
Other
Performing.................................................... $ 268,785 $
3,046
Nonperforming .............................................
Total originated loans ............................. $ 271,831 $
70,927 $ 160,030 $ 28,490 $
216
818
71,537 $ 160,848 $ 28,706 $
610
Acquired loans:
Performing....................................................
Nonperforming .............................................
Total acquired loans ................................ $
96,079
682
96,761 $
Total loans ......................................... $ 368,592 $
14,223
0
28,585
0
155
170
28,755 $
0 $ 14,378 $
100,292 $ 160,848 $ 43,084 $
8,862
14
8,876
128
0
128
9,004
81
December 31, 2016
Originated loans:
Residential Real Estate
Consumer
1-4 Family
Residential
Home Equity Lines
of Credit
Indirect
Direct
Other
Performing.................................................... $ 221,476 $
2,224
Nonperforming .............................................
Total originated loans ............................. $ 223,700 $
59,362 $ 160,977 $ 26,772 $
74
736
59,682 $ 161,713 $ 26,846 $
320
Acquired loans:
Performing....................................................
Nonperforming .............................................
111,087
931
Total acquired loans ................................ $ 112,018 $
Total loans ......................................... $ 335,718 $
21,498
0
34,567
0
184
228
34,795 $
0 $ 21,682 $
94,477 $ 161,713 $ 48,528 $
7,596
16
7,612
247
0
247
7,859
NOTE 5 – LOAN SERVICING
The Company began servicing loans upon the acquisition of First National Bank’s servicing portfolio in June 2015.
Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year-end are
as follows:
Mortgage loan portfolio serviced for:
FHLMC ................................................................................................. $
179,253
$
121,274
2017
2016
Custodial escrow balances maintained in connection with serviced loans were $1.4 million at December 31, 2017
and $961 thousand at December 31, 2016.
Mortgage servicing rights is recorded on the balance sheets as other assets. Activity for mortgage servicing rights
for years ended December 31, 2017, 2016 and 2015 are as follows:
Servicing rights:
Beginning balance ................................................................... $
Additions .................................................................................
Amortization to expense..........................................................
Ending balance ........................................................................ $
2017
854
701
(313)
1,242
$
$
2016
453
611
(210)
854
$
$
2015
347
166
(60)
453
There was no valuation allowance required for mortgage servicing rights at December 31, 2017, 2016 and 2015.
NOTE 6 - FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
82
The Company used the following methods and significant assumptions to estimate the fair value of each type of
financial instrument:
Investment Securities
The Company used a third party service to estimate fair value on available for sale securities on a monthly basis.
This service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities.
They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing
methods. The fair values for investment securities are determined by quoted market prices in active markets, if
available (Level 1). For securities where quoted prices are not available, fair values are calculated based on quoted
prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs
other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include
interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Inputs used are derived
principally from observable market data (Level 2). For securities where quoted prices or market prices of similar
securities are not available, fair values are calculated using discounted cash flows or other market indicators
(Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure
fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs
and assumptions based on the best information at the time, to the extent that inputs are available without undue cost
and effort. For the years ended December 31, 2017 and 2016 the fair value of Level 3 investment securities was
immaterial.
Derivative Instruments
The fair values of derivative instruments are based on valuation models using observable market data as of the
measurement date (Level 2).
Impaired Loans
At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair
value and non-collateral dependent loans are valued based on discounted cash flows. Impaired loans carried at fair
value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans fair
value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income approach. Adjustments are routinely
made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs
for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the
borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical
knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge
of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a
quarterly basis for additional impairment and adjusted accordingly.
Other Real Estate Owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may
use a single valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and
typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified
general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for
residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once
received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as
83
well as the overall resulting fair value in comparison with independent data sources such as recent market data or
industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has
been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at
fair value.
Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at December 31, 2017
Using:
Quoted
Prices in
Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
Financial Assets
Investment securities available-for sale
0
0
0
8
0
0
0
8
0
0
8,917 $
8,917 $
U.S. Treasury and U.S. government sponsored
entities.................................................................... $
State and political subdivisions ................................
Corporate bonds........................................................
Mortgage-backed securities-residential....................
Collateralized mortgage obligations.........................
Small Business Administration ................................
Equity securities .......................................................
191,003
1,234
160,450
17,121
14,212
394
Total investment securities.................................. $ 393,331
653
Loan yield maintenance provisions................................ $
$
$
0 $
0
0
0
0
0
394
394
0
191,003
1,234
160,442
17,121
14,212
0
$ 392,929
653
$
$
$
Financial Liabilities
Interest rate swaps.......................................................... $
653
$
0
$
653
$
84
Fair Value Measurements at December 31, 2016
Using:
Quoted
Prices in
Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
Financial Assets
Investment securities available-for sale
5,921 $
5,921 $
U.S. Treasury and U.S. government sponsored
entities.................................................................... $
State and political subdivisions ................................
Corporate bonds........................................................
Mortgage-backed securities-residential....................
Collateralized mortgage obligations.........................
Small Business Administration ................................
Equity securities .......................................................
155,303
1,339
169,682
20,693
16,706
351
Total investment securities.................................. $ 369,995
685
Loan yield maintenance provisions .......................... $
$
$
0 $
0
0
0
0
0
351
351
0
155,303
1,339
169,670
20,693
16,706
0
$ 369,632
685
$
$
$
Financial Liabilities
Interest rate swaps.......................................................... $
685
$
0
$
685
$
0
0
0
12
0
0
0
12
0
0
There were no significant transfers between Level 1 and Level 2 during 2017 or 2016.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31:
Investment Securities Available-for-sale
(Level 3)
2016
2017
2015
Beginning Balance ............................................................................ $
12
$
Total unrealized gains or losses:
Included in other comprehensive income ..............................
Repayments, calls and maturities ................................................
Acquired and/or purchased ..........................................................
Ending Balance ................................................................................. $
0
(4)
0
8
$
15
$
0
(3)
0
12
$
10
0
(1)
6
15
There is no impact to earnings as a result of fair value measurements on items valued on a recurring basis, using
level 3 inputs.
85
Assets Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements
at December 31, 2017 Using:
Quoted
Prices in
Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
Financial Assets
Impaired loans
1–4 family residential ............................................... $
Consumer..................................................................
$
740
2
$
0
0
$
0
0
740
2
Fair Value Measurements
at December 31, 2016 Using:
Quoted
Prices in
Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
Financial Assets
Impaired loans
Commercial real estate
Owner occupied .................................................. $
Farmland .............................................................
$
23
339
Commercial
Agricultural .........................................................
1–4 family residential ...............................................
Consumer..................................................................
Other real estate owned
1–4 family residential ...............................................
113
77
2
16
$
0
0
0
0
0
0
$
0
0
0
0
0
0
23
339
113
77
2
16
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans,
had a principal balance of $851 thousand, with a valuation allowance of $109 thousand at December 31, 2017,
resulting in an additional provision for loan losses of $272 thousand for the year ending December 31, 2017. At
December 31, 2016, impaired loans had a principal balance of $727 thousand, with a valuation allowance of $173
thousand. Loans measured at fair value throughout the year resulted in an additional provision for loan losses of
$139 thousand for the year ending December 31, 2016. Excluded from the fair value of impaired loans, at
December 31, 2017 and 2016, discussed above are $763 thousand and $2.0 million of loans classified as troubled
debt restructurings and measured using the present value of cash flows, which is not considered an exit price.
Impaired commercial real estate loans, both owner occupied and non-owner occupied are valued by independent
external appraisals. These external appraisals are prepared using the sales comparison approach and income
approach valuation techniques. Management makes subsequent unobservable adjustments to the impaired loan
appraisals. Impaired loans other than commercial real estate and other real estate owned are not considered material.
86
At December 31, 2017, other real estate owned measured at fair value less costs to sell, had a zero net carrying
amount. During the year ended December 31, 2017 the Company charged down one property reflecting an updated
appraisal which resulted in a write-down of $23 thousand. The Company had $36 thousand related write downs
during the year ended December 31, 2016.
The following table presents quantitative information about level 3 fair value measurements for financial
instruments measured at fair value on a non-recurring basis at year ended 2017 and 2016:
December 31, 2017
Impaired loans
Fair value
Valuation
Technique(s)
Unobservable
Input(s)
Range
Weighted Average
Residential .............................. $
740 Sales comparison
Consumer................................
2 Sales comparison
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
(15.76%) - 27.92%
0.53%
(21.98%) - 21.98%
(0.00%)
December 31, 2016
Impaired loans
Fair value
Valuation
Technique(s)
Unobservable
Input(s)
Range
Weighted Average
Commercial real estate ........... $
23 Sales comparison
Commercial ............................
Quoted price for
loan relationship
Quoted price for
loan relationship
339
113
Residential ..............................
77 Sales comparison
Consumer................................
2 Sales comparison
Other real estate owned -
residential ...............................
16 Sales comparison
Adjustment for
differences
between
comparable sales
Offer price
Offer price
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
(24.02%)
35.77%
34.98%
(12.97%) - 14.22%
(3.38%)
(20.00%) - 20.00%
(0.00%)
(10.36%) - 17.10%
(1.90%)
87
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments measured on a recurring basis and not
previously presented, at December 31, 2017 and December 31, 2016 are as follows:
Fair Value Measurements at December 31,
2017 Using:
Carrying
Amount
Level 1 Level 2 Level 3
Total
Financial assets
57,614 $
Cash and cash equivalents ................................... $
10,491
Restricted stock....................................................
272
Loans held for sale...............................................
Loans, net............................................................. 1,565,066
6,669
Accrued interest receivable .................................
Financial liabilities
17,785 $ 39,829 $
n/a
283
0 $
57,614
n/a
n/a
283
0
0 1,569,381 1,569,381
6,669
4,414
2,255
n/a
0
0
0
Deposits ............................................................... 1,604,719 1,340,814 259,346
0 289,565
Short-term borrowings.........................................
6,690
0
Long-term borrowings.........................................
587
46
Accrued interest payable .....................................
289,565
6,994
633
0 1,600,160
289,565
0
6,690
0
633
0
Fair Value Measurements at December 31,
2016 Using:
Carrying
Amount
Level 1 Level 2 Level 3
Total
Financial assets
41,778 $
Cash and cash equivalents ................................... $
9,583
Restricted stock....................................................
355
Loans held for sale...............................................
Loans, net............................................................. 1,416,783
5,504
Accrued interest receivable .................................
Financial liabilities
19,678 $ 22,100 $
n/a
365
0 $
41,778
n/a
n/a
365
0
0 1,406,951 1,406,951
5,504
3,580
1,924
n/a
0
0
0
Deposits ............................................................... 1,524,756 1,289,037 232,410
0 198,460
Short-term borrowings.........................................
15,009
0
Long-term borrowings.........................................
472
35
Accrued interest payable .....................................
198,460
15,036
507
0 1,521,447
198,460
0
15,009
0
507
0
The methods and assumptions used to estimate fair value, not previously described, are described as follows:
Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and
are classified as either Level 1 or Level 2. The Company has determined that cash on hand and non-interest bearing
due from bank accounts are Level 1 whereas interest bearing federal funds sold and other are Level 2.
Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its
transferability.
88
Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a
Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3
classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods
utilized to estimate the fair value of loans do not necessarily represent an exit price.
Loans held for sale: The fair value of loans held for sale is estimated based upon the average of binding contracts
and quotes from third party investors resulting in a Level 2 classification.
Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate
fair value resulting in a Level l, Level 2 or Level 3 classification. The classification is the result of the association
with securities, loans and deposits.
Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings and
money market accounts—are, by definition, equal to the amount payable on demand at the reporting date resulting
in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values
at the reporting date resulting Level 2 classification. Fair value for fixed rate certificates of deposit are estimated
using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements,
and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a
Level 2 classification.
Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash
flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level
2 classification.
Off-balance Sheet Instruments: The fair value of commitments is not considered material.
Year-end premises and equipment were as follows:
NOTE 7—PREMISES AND EQUIPMENT
Land .................................................................................................................... $
Buildings.............................................................................................................
Furniture, fixtures and equipment.......................................................................
Leasehold Improvements....................................................................................
Less accumulated depreciation ...........................................................................
NET BOOK VALUE .................................................................................... $
2017
4,775 $
24,692
13,739
482
43,688
(21,402)
22,286 $
2016
4,972
25,064
14,169
466
44,671
(21,446)
23,225
Depreciation expense was $1.6 million for year ended December 31, 2017, $1.7 million for year ended
December 31, 2016 and $1.5 million for year ended December 31, 2015.
During August 2017 the Company added one location in Holmes County as part of the Monitor acquisition. All
fixed assets were recorded at their fair market value.
During June 2016 the Company added one location with the addition of Bowers Insurance Group in Trumbull
County. All fixed assets were recorded at their fair market value.
89
The Company leases certain branch properties under operating leases. Rent expense was $449, $362, and $332
thousand for 2017, 2016 and 2015, respectively. In addition to rent expense, under the leases, common area
maintenance and property taxes are paid and the amount can fluctuate according to the costs incurred. Rent
commitments, before considering renewal options that generally are present, were as follows:
2018.............................................................................................................................................. $
2019..............................................................................................................................................
2020..............................................................................................................................................
2021..............................................................................................................................................
2022..............................................................................................................................................
Thereafter.....................................................................................................................................
TOTAL ................................................................................................................................... $
425
419
384
380
270
973
2,851
NOTE 8—GOODWILL AND INTANGIBLE ASSETS
Goodwill associated with the Company’s recent purchases of Monitor in August 2017, Bowers in June 2016, NBOH
in June 2015, Tri-State in October 2015 and other past acquisitions totaled $38.2 million at December 31, 2017 and
$37.2 million at December 31, 2016. The Monitor, Bowers, NBOH and Tri-State acquisitions are more fully
described in Note 2. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value,
which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of
the reporting units, including the existing goodwill and intangible assets, and estimating the fair value of the
reporting units. When the carrying amount of a reporting unit exceeds its fair value, a second step to the impairment
test is required. Step 2 requires that the implied fair value of the reporting unit’s goodwill be compared to the
carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair
value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. After our annual
impairment analysis as of September 30, 2017, the Company determined the fair value of all goodwill exceeded its
carrying amount.
Other Intangibles
Core deposit intangible assets associated with the Company’s purchases of Monitor, NBOH and Tri-State totaled
$6.3 million.
Other intangible assets were as follows at year end:
2017
2016
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Other intangible:
Customer relationship intangibles.................................. $
Non-compete contracts ..................................................
Trade Name....................................................................
Core deposit intangible ..................................................
Total..................................................................................... $
7,210 $
430
520
6,254
14,414 $
(4,919) $
(376)
(175)
(1,776)
(7,246) $
7,210 $
430
520
5,582
13,742 $
(4,253)
(357)
(113)
(1,029)
(5,752)
Aggregate amortization expense was $1.5 million for 2017 and 2016, and $983 thousand for 2015.
90
Estimated amortization expense for each of the next five years and thereafter:
2018.............................................................................................................................................. $
2019..............................................................................................................................................
2020..............................................................................................................................................
2021..............................................................................................................................................
2022..............................................................................................................................................
Thereafter.....................................................................................................................................
TOTAL ................................................................................................................................... $
1,418
1,306
1,203
1,142
1,025
1,074
7,168
NOTE 9 - INTEREST BEARING DEPOSITS
Time deposits of $250 thousand or more were $51.9 million and $43.3 million at year-end 2017 and 2016.
Following is a summary of scheduled maturities of certificates of deposit during the years following December 31,
2017:
2018............................................................................................................................................... $
2019...............................................................................................................................................
2020...............................................................................................................................................
2021...............................................................................................................................................
2022...............................................................................................................................................
Thereafter ......................................................................................................................................
TOTAL .................................................................................................................................... $
92,678
46,243
35,619
55,086
20,424
13,855
263,905
Following is a summary of year-end interest bearing deposits:
Demand...................................................................................................... $
Money Market ...........................................................................................
Savings ......................................................................................................
Certificates of Deposit...............................................................................
TOTAL................................................................................................. $
2017
440,347 $
253,181
234,940
263,905
1,192,373 $
2016
378,317
317,079
226,770
235,720
1,157,886
91
NOTE 10 - SHORT-TERM BORROWINGS
The Bank has short-term advances from the FHLB that had maturity dates of less than one year at the time of the
advance. All balances are due within one year and can be renewed at the time of maturity. FHLB advances are
secured by pledgings described in the following Long-Term Borrowings footnote. Balances at year end were as
follows:
2017
Weighted
Average
Rate
2016
Weighted
Average
Rate
Amount
Amount
Repurchase advance with a rate of .59% to 1.48% at
December 31, 2017 and 2016........................................... $ 125,000
Fixed rate advances with a rate of 1.43% to 1.49% at
December 31, 2017...........................................................
Cash management advance with rates from 0% to .59%
0
at December 31, 2017 and 2016 .......................................
Total advances ..................................................................... $ 215,000
90,000
1.47% $ 100,000
0.63%
1.45%
0
0.00%
0.00%
20,000
1.46% $ 120,000
0.59%
0.63%
Securities sold under repurchase agreements are secured by the Bank’s holdings of debt securities issued by U.S.
government sponsored entities and agencies. These pledged securities which are 105% of the repurchase agreement
balances, had a carrying amount of $77.9 million and $82.0 million at year ended 2017 and 2016.
Repurchase agreements are financing arrangements that mature within 89 days and usually overnight. Under the
agreements, customers agree to maintain funds on deposit with the Bank and in return acquire an interest in a pool of
securities pledged as collateral against the funds. The securities are held in segregated safekeeping accounts at the
Federal Reserve Bank, Trust and the FHLB. Information concerning securities sold under agreements to repurchase
is summarized as follows:
Average balance during the year ...................................................... $
Average interest rate during the year ...............................................
Maximum month-end balance during the year ................................ $
Weighted average year-end interest rate ..........................................
Balance at year-end .......................................................................... $
2017
82,627
$
0.13%
$
0.14%
$
74,215
94,208
2016
84,368
$
0.07%
$
0.08%
$
78,110
98,687
2015
71,779
0.07%
89,574
0.06%
75,482
The following table provides a disaggregation of the obligation by class of collateral pledged for short-term
financing obtained through the sales of repurchase agreements:
Overnight and continuous repurchase agreements
U.S. Treasury and U.S. government sponsored entities................................ $
State and political subdivisions .....................................................................
Mortgage-backed securities - residential.......................................................
Collateralized mortgage obligations..............................................................
Total borrowings................................................................................................. $
4,811 $
20,696
43,936
4,772
74,215 $
6,555
12,304
52,628
6,623
78,110
2017
2016
Management believes the risks associated with the agreements are minimal and in the case of collateral decline the
Company has additional investment securities available to adequately pledge as guarantees for the repurchase
agreements.
92
The Bank has access to lines of credit amounting to $20 million at two major domestic banks that are below prime
rate. The lines and terms are periodically reviewed by the banks and are generally subject to withdrawal at their
discretion. There were no borrowings under these lines at December 31, 2017 and 2016.
Farmers has two unsecured revolving lines of credit for $6.5 million. The lines can be renewed annually. The lines
have interest rates of prime with floors of 3.5% and 4.5%. The outstanding balance on the two lines was $350
thousand at December 31, 2017 and 2016. The interest rate on the outstanding balance at December 31, 2017 and
2016 was 4.5%.
At year end, long-term advances from the FHLB were as follows:
NOTE 11 - LONG-TERM BORROWINGS
2017
2016
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
Fixed-rate constant payment advance, at rates from 1.20%
to 1.70% at December 31, 2017 and 2016........................ $
Convertible and putable fixed-rate advance with a rate of
4.45% at December 31, 2016 ...........................................
Total advances ..................................................................... $
4,785
1.70% $
7,876
1.57%
0
4,785
0.00%
1.70% $
5,000
12,876
4.45%
2.69%
Long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage loans totaling
$280.2 million and $276.9 million at year end 2017 and 2016. Based on this collateral, the Bank is eligible to
borrow an additional $60.4 million at year end 2017. Each advance is subject to a prepayment penalty if paid prior
to its maturity date.
Scheduled payments of long-term FHLB advances are as follows:
Maturing in:
2018.............................................................................................................................................. $
2019..............................................................................................................................................
2020..............................................................................................................................................
2021..............................................................................................................................................
2022..............................................................................................................................................
Thereafter.....................................................................................................................................
TOTAL ................................................................................................................................... $
1,075
931
860
792
729
398
4,785
The Company added a special purpose entity to hold $2.1 million in Trust Preferred Debenture as part of the Tri-
State acquisition in 2015. The debt has a floating rate that is determined quarterly based on the three-month LIBOR.
At December 31, 2017, the interest rate was 3.02%. These securities can be redeemed at any quarter-end. Final
maturity of the Trust Preferred Debenture is December 15, 2036. The balance of the outstanding Trust Preferred
Debenture was $2.2 million at year end 2017 and 2016.
93
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are
issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire
without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make such commitments as are used for
loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
2017
2016
Commitments and unused lines of credit ..... $
Fixed Rate Variable Rate Fixed Rate Variable Rate
247,080
265,260 $
74,798 $
74,119 $
Commitments to make loans are generally made for periods of 30 days or less. Commitments and fixed rate unused
lines of credit have interest rates ranging from 2.99% to 16.00% at December 31, 2017 and 0.10% to 18.00% at
December 31, 2016. There were six fixed rate loan commitments for 2016 that has an interest rate of 4.25% to
5.25% and matures within fifteen years. Variable rate loan commitments had interest rates at December 31, 2016
that ranged from 4.69% to 5.75%.
Standby letters of credit are considered financial guarantees. The standby letters of credit have a contractual value
of $4.9 million at December 31, 2017 and $4.3 million at December 31, 2016. The carrying amount of these items
on the balance sheet is not material.
Additionally, the Company has committed up to a $8 million subscription in SBIC investment funds. At December
31, 2017 the Company had invested $5.0 million in these funds.
NOTE 13 - STOCK BASED COMPENSATION
During 2017, the Company, with the approval of shareholders, created the 2017 Equity Incentive Plan (the “2017
Plan”). The 2017 Plan permits the award of up to 800 thousand shares to the Company’s directors and employees to
attract and retain exceptional personnel, motivate performance and most importantly to help align the interests of
Farmers’ executives with those of the Company’s shareholders. There were 63,248 service time based shares and
64,993 performance based shares granted under the 2017 Plan during the year ended December 31, 2017, as shown
in the table below. The actual number of performance based stock awards issued will depend on certain performance
conditions which are mainly average return on equity compared to a group of peer companies over a three year
vesting period.
During 2012, the Company, with the approval of shareholders, created the 2012 Equity Incentive Plan (the “2012
Plan”). The 2012 Plan permits the award of up to 500 thousand shares to the Company’s directors and employees to
promote the Company’s long-term financial success by motivating performance through long-term incentive
compensation and to better align the interests of its employees with those of its shareholders. There were no
additional shares granted under the Plan during 2017 as detailed in the table below. Any new restricted stock
awards will be issued under the 2017 Plan described above.
The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common
stock at the date of grant. Expense recognized for both Plans was $2.4 million for 2017, $892 thousand for 2016
and $486 thousand for 2015. As of December 31, 2017, there was $1.3 million of total unrecognized compensation
expense related to the non-vested shares granted under the Plan. The remaining cost is expected to be recognized
over the next 2 years.
94
The following is the activity under the Plans during the years ended December 31, 2017:
2017 Incentive Plan
2012 Incentive Plan
Maximum
Awarded
Units
Beginning balance - nonvested shares.....................
Granted ....................................................................
Vested ......................................................................
Forfeited ..................................................................
Ending balance - nonvested shares..........................
0 $
128,241
0
(3,623)
124,618 $
Weighted
Average
Grant Date
Fair Value
0.00
13.77
0
13.53
13.77
Maximum
Awarded
Units
499,390 $
0
(21,928)
(12,234)
465,228 $
Weighted
Average
Grant Date
Fair Value
8.30
0
7.14
8.28
8.14
NOTE 14 - REGULATORY MATTERS
Banks and financial holding companies are subject to various regulatory capital requirements administered by the
federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action
regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under
regulatory accounting practices. The new minimum capital requirements associated with the Basel Committee on
capital and liquidity regulation (Basel III) are being phased in and began on January 1, 2015 and will continue
through January 1, 2019. Capital amounts and classifications are also subject to qualitative judgments by regulators.
Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a
direct material effect on the financial statements. Management believes as of December 31, 2017, the Company and
the Bank meet all capital adequacy requirements to which they are subject.
The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial
holding companies and insured depository institutions, including the Company and the Bank, to make them
consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).
The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective
capital amounts by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted
average total assets.
Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not
hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total
capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital
requirements. The capital conservation buffer began the phase in January 1, 2016 and will increase each year until
fully implemented at 2.5% on January 1, 2019. The capital conservation buffer was 1.25% during 2017 and was
0.625% during 2016. The buffer required an additional capital amount of $31.5 million at year end 2017 and an
additional $19.3 million at year end 2016. Excluding the additional capital conservation buffer, Basel III requires
the Company and the Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets
of at least 4.5%, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio
of total capital to risk-weighted assets of at least 8.0% and (iv) a minimum leverage ratio of at least 4.0%.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to
represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept
brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end 2017 and 2016, the most recent regulatory notifications categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the institution’s category.
95
Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from
the Bank, Trust and NAI. The Bank and Trust are subject to the dividend restrictions set forth by the Comptroller of
the Currency and Ohio Department of Commerce – Division of Financial Institutions, respectively. The respective
regulatory agency must approve declaration of any dividends in excess of the sum of profits for the current year and
retained net profits for the preceding two years. During 2018, the Bank could, without prior approval, declare
dividends of approximately $16.2 million plus any 2018 net profits retained to the date of the dividend declaration.
In order to practice trust powers, Trust must maintain a minimum capital of $3 million. The Trust would also be
able to, without prior approval, declare dividends of $400 thousand plus any 2018 net profits retained to the date of
the dividend declaration.
Actual and required capital amounts (not including the capital conservation buffer) and ratios are presented below at
year-end:
Requirement For
Capital
Adequacy
Purposes:
Amount Ratio
To be Well
Capitalized
Under Prompt
Corrective
Action Provisions:
Amount Ratio
Actual
Amount Ratio
2017
Common equity tier 1 capital ratio
Consolidated................................................ $199,201 11.86% $ 75,573
Bank ............................................................ 192,080 11.45% 75,462
4.5% N/A N/A
4.5% 109,001
6.5%
Total risk based capital ratio
Consolidated................................................ 213,725 12.73% 134,352
Bank ............................................................ 204,395 12.19% 134,155
8.0% N/A N/A
8.0% 167,694
10.0%
Tier I risk based capital ratio
Consolidated................................................ 201,410 11.99% 100,764
Bank ............................................................ 192,080 11.45% 100,616
6.0% N/A N/A
6.0% 134,155
8.0%
Tier I leverage ratio
Consolidated................................................ 201,410
Bank ............................................................ 192,080
9.50% 84,800
9.12% 84,253
4.0% N/A N/A
4.0% 105,316
5.0%
2016
Common equity tier 1 capital ratio
Consolidated................................................ $180,475 11.69% $ 69,474
Bank ............................................................ 171,064 11.12% 69,244
4.5% N/A N/A
4.5% 100,020
6.5%
Total risk based capital ratio
Consolidated................................................ 193,487 12.53% 123,509
Bank ............................................................ 181,916 11.82% 123,101
8.0% N/A N/A
8.0% 153,877
10.0%
Tier I risk based capital ratio
Consolidated................................................ 182,635 11.83% 92,632
Bank ............................................................ 171,064 11.12% 92,326
6.0% N/A N/A
6.0% 123,101
8.0%
Tier I leverage ratio
Consolidated................................................ 182,635
Bank ............................................................ 171,064
9.41% 77,596
8.91% 76,792
4.0% N/A N/A
4.0% 95,990
5.0%
96
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) deferred compensation Retirement Savings Plan (the “Savings Plan”). All
employees of the Company who have completed at least 90 days of service and meet certain other eligibility
requirements are eligible to participate in the Savings Plan. Under the terms of the Savings Plan, employees may
voluntarily defer a portion of their annual compensation pursuant to section 401(k) of the Internal Revenue Code.
The Company matches a percentage of the participants’ voluntary contributions up to 6% of gross wages. In
addition, at the discretion of the Board of Directors, the Company may make an additional profit sharing
contribution to the Savings Plan. Total expense was $556 thousand, $506 thousand and $431 thousand for the years
ended December 31, 2017, 2016 and 2015, respectively.
During 2014 the Company adopted a profit sharing plan to provide associates not participating in a current incentive
plan a vehicle for sharing in the success of the Company outside of existing wages and non-monetary benefits. The
Board of Directors approved a profit sharing amount equal to 1% of annual compensation for associates in 2017,
2016 and 2015. The expense was $103 thousand, $103 thousand and $82 thousand for the years ended December
31, 2017, 2016 and 2015, respectively.
The Company maintains a deferred compensation plan for certain retirees. Expense under this plan was $8
thousand, $9 thousand and $10 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. The
liability under the deferred compensation plan at December 31, 2017 was $133 thousand and $141 thousand at
December 31, 2016.
During 2015, the Company established a nonqualified deferred compensation plan for a select group of management
or highly compensated eligible individuals. Under the terms of the plan, eligible individuals may elect to defer
receipt of their compensation to a later taxable year. The Company has recorded both an asset and liability of equal
amount that represents the amount of contributions and the payable due to the participants in the plan. The recorded
asset and liability was $566 thousand, $345 thousand and $67 thousand at December 31, 2017, 2016 and 2015,
respectively.
As part of the NBOH acquisition the Company has a director retirement and death benefit plan for the benefit of
prior members of the Board of Directors of NBOH. The plan is designed to provide an annual retirement benefit to
be paid to each director upon retirement from the Board or attaining age 70. There are no additional benefits or
participants being added to the plan and the liability recorded at December 31, 2017 and 2016 was $1 million. The
benefit payment upon satisfying the plan’s requirements is a benefit to the qualifying director until death or a
maximum of 15 years. The expense under this plan was $91 thousand, $130 thousand and $0 in 2017, 2016 and
2015, respectively.
The Company assumed an employee stock ownership plan (“ESOP”) as part of the Tri-State acquisition that covered
substantially all of their employees and officers. The Company terminated this plan during 2017. The trustee had
discretionary authority to purchase shares of common stock of Tri-State on the open market. There were no
contributions to the plan in 2017 or 2016. During acquisition the Tri-State ESOP shares were converted to the
Company’s shares and distributed to participants. The trustee held no shares at December 31, 2017, and 39,690
shares at December 31, 2016.
The Company had a postretirement health care benefit plan that covered individuals retired from the Company that
have met certain service and age requirements and certain other active employees that have met similar service
requirements. The Company terminated the plan during 2017. A benefit was recognized under this plan of $70
thousand, $184 thousand and $12 thousand at December 31, 2017, 2016 and 2015, respectively. Due to the
termination of the plan the accrued postretirement benefit liability at December 31, 2017 and 2016 is $0 and $70
thousand , respectively. Due to the immateriality of the plan, the disclosures required under U.S. generally accepted
accounting principles have been omitted.
97
The provision for income taxes (credit) consists of the following:
NOTE 16 - INCOME TAXES
Current expense................................................................................. $
Deferred expense (benefit)................................................................
TOTALS...................................................................................... $
2017
9,451 $
618
10,069 $
2016
8,642 $
(1,157)
7,485 $
2015
3,046
(547)
2,499
Effective tax rates differ from federal statutory rate of 35% applied to income before income taxes due to the
following:
Statutory tax ...................................................................................... $
Effect of nontaxable interest........................................................
Bank owned life insurance, net....................................................
Tax credits ...................................................................................
Effect of nontaxable insurance premiums ...................................
Impact of enactment of federal tax reform ..................................
Nondeductible acquisition costs ..................................................
Other ............................................................................................
ACTUAL TAX ...................................................................... $
Deferred tax assets (liabilities) are comprised of the following:
2017
11,474 $
(2,054)
(291)
(371)
(348)
1,793
70
(204)
10,069 $
2016
9,815 $
(1,684)
(283)
(367)
(143)
0
40
107
7,485 $
Deferred tax assets:
Allowance for credit losses ........................................................................... $
Net unrealized loss on securities available for sale.......................................
Deferred and accrued compensation .............................................................
Deferred loan fees and costs..........................................................................
Post-retirement benefits ................................................................................
Nonaccrual loan interest income ...................................................................
Other-than-temporary impairment ................................................................
Restricted stock .............................................................................................
AMT credit carryforward ..............................................................................
Other..............................................................................................................
Gross deferred tax assets ......................................................................... $
Deferred tax liabilities:
Depreciation and amortization ...................................................................... $
Net unrealized gain on securities available for sale ......................................
Federal Home Loan Bank dividends.............................................................
Purchase accounting adjustments..................................................................
Mortgage servicing rights .............................................................................
Prepaid expenses ...........................................................................................
Other..............................................................................................................
Gross deferred tax liabilities ....................................................................
NET DEFERRED TAX ASSET ........................................................ $
2017
2,525 $
0
981
517
0
416
25
647
64
73
5,248 $
(448) $
(159)
(656)
(744)
(261)
(277)
(8)
(2,553)
2,695 $
No valuation allowance for deferred tax assets was recorded at December 31, 2017 and 2016.
2015
3,694
(1,403)
(242)
(236)
0
0
401
285
2,499
2016
3,621
1,522
1,922
729
25
306
196
509
205
106
9,141
(740)
0
(1,093)
(1,559)
(299)
(271)
(15)
(3,977)
5,164
98
At December 31, 2017 and December 31, 2016, the Company had no unrecognized tax benefits recorded. The
Company does not expect the amount of unrecognized tax benefits to significantly change within the next twelve
months.
The Company has approximately $64 thousand of alternative minimum tax credits that can be carried forward
indefinitely.
The Company paid no penalties for the year ended December 31, 2017 or 2016. There were no amounts accrued for
penalties or interest as of December 31, 2017 or 2016.
The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by the federal
taxing authority for years prior to 2014. The tax years 2014—2017 remain open to examination by the U.S. taxing
authority.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law.
The Act includes several provisions that will affect the Company’s federal income tax expense, including reducing
the federal income tax rate to 21% effective January 1, 2018. As a result of the rate reduction, the Company is
required to re-measure, through income tax expense in the period of enactment, the deferred tax assets and liabilities
using the enacted rate at which these items are expected to be recovered or settled. The re-measurement of the
Company’s net deferred tax asset resulted in additional 2017 income tax expense of $1.8 million.
99
NOTE 17 – OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the detail of other comprehensive income (loss) for the years ended December 31,
2017, 2016 and 2015.
Unrealized holding losses on available-for-sale securities during
the year ........................................................................................... $
Reclassification adjustment for (gains) losses included in net
income (1) ......................................................................................
Net unrealized losses on available-for-sale securities.......................
Change in funded status of post-retirement health plan....................
Net other comprehensive income (loss)............................................ $
Unrealized holding losses on available-for-sale securities during
the year ........................................................................................... $
Reclassification adjustment for (gains) losses included in net
income (1) ......................................................................................
Net unrealized gains on available-for-sale securities........................
Change in funded status of post-retirement health plan....................
Net other comprehensive income (loss)............................................ $
Unrealized holding gains on available-for-sale securities during
the year ........................................................................................... $
Reclassification adjustment for (gains) losses included in net
income (1) ......................................................................................
Net unrealized losses on available-for-sale securities.......................
Change in funded status of post-retirement health plan....................
Net other comprehensive income (loss)............................................ $
Pre-tax
2017
Tax
After-Tax
5,107
$
(1,788) $
3,319
(4)
5,103
(55)
$
5,048
2
(1,786)
19
(1,767) $
(2)
3,317
(36)
3,281
Pre-tax
2016
Tax
After-Tax
(4,270) $
1,494
$
(2,776)
(73)
(4,343)
(156)
(4,499) $
26
1,520
55
1,575
$
(47)
(2,823)
(101)
(2,924)
Pre-tax
2015
Tax
After-Tax
(1,403) $
491
$
(94)
(1,497)
20
(1,477) $
33
524
(7)
$
517
(912)
(61)
(973)
13
(960)
(1)
Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and
the tax impact is included in income tax expense on the consolidated statements of income.
NOTE 18 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates during 2017 were as follows:
Beginning balance........................................................................................................................ $
New loans.....................................................................................................................................
Effect of changes in composition of related parties.....................................................................
Repayments..................................................................................................................................
Ending balance............................................................................................................................. $
1,096
15
19,703
(293)
20,521
Deposits from principal officers, directors, and their affiliates at year-end 2017 and 2016 were $5.9 million and
$12.0 million.
100
The factors used in the earnings per share computation follow:
NOTE 19 – EARNINGS PER SHARE
Basic EPS
Net income ............................................................................ $
Weighted average shares outstanding ...................................
Basic earnings per share ............................................... $
$
22,711
27,567,909
$
0.82
20,557
$
27,180,230
$
0.76
8,055
22,678,338
0.36
2017
2016
2015
Diluted EPS
Net income ............................................................................ $
Weighted average shares for basic earnings per share..........
Average unvested restricted stock awards ............................
Weighted average shares for diluted earnings per share .......
Diluted earnings per share ............................................ $
$
22,711
27,567,909
51,167
27,619,076
$
0.82
$
20,557
27,180,230
29,108
27,209,338
0.76 $
8,055
22,678,338
5,232
22,683,570
0.36
There were no restricted stock awards that were considered anti-dilutive at year end 2017 and 2016. There were
193,105 award shares of common stock that were not considered in computing diluted earnings per share because
they were anti-dilutive at year end 2015.
NOTE 20 – INTEREST RATE SWAPS
The Company uses a program that utilizes interest-rate swaps as part of its asset/liability management strategy. The
interest-rate swaps are used to help manage the Company’s interest rate risk position and not as derivatives for
trading purposes. The notional amount of the interest-rate swaps does not represent amounts exchanged by the
parties. The amount exchanged is determined by reference to the notional amount and the other terms of the
individual interest-rate swap agreements.
The objective of the interest-rate swaps is to protect the related fixed rate commercial real estate loans from changes
in fair value due to changes in interest rates. The Company has a program whereby it lends to its borrowers at a
fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the
event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap. The yield
maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as
such, the swaps and embedded derivatives are not designated as hedges. Accordingly, both instruments are carried
at fair value and changes in fair value are reported in current period earnings.
Summary information about these interest-rate swaps as of year ended December 31, 2017, 2016 and 2015 is as
follows:
2017
38,481
$
4.46%
3.81%
3.2
(653)
653
$
$
Notional amounts ............................................................... $
Weighted average pay rate on interest-rate swaps .............
Weighted average receive rate on interest-rate swaps........
Weighted average maturity (years) ....................................
Fair value of interest-rate swaps......................................... $
Fair value of loan yield maintenance provisions................ $
101
2016
34,360
$
4.34%
3.04%
4.8
(685)
685
$
$
2015
30,763
4.25%
2.70%
4.1
(789)
789
The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other
liabilities, respectively, in the consolidated balance sheet. Changes in the fair value of the yield maintenance
provisions and interest-rate swaps are reported in earnings, as other noninterest income in the consolidated income
statements. There were no net gains or losses recognized in earnings related to yield maintenance provisions for
years ended December 31, 2017, 2016 and 2015.
NOTE 21 – SEGMENT INFORMATION
The reportable segments are determined by the products and services offered, primarily distinguished between
banking, trust and retirement consulting operations. They are also distinguished by the level of information
provided to the chief operating decision makers in the Company, who use such information to review performance
of various components of the business, which are then aggregated. Loans, investments and deposits provide the
revenues in the banking operation, trust service fees provide the revenue in trust operations and consulting fees
provide the revenues in the retirement consulting operations. All operations are domestic.
Accounting policies for segments are the same as those described in Note 1. Segment performance is evaluated
using operating income. Income taxes are calculated on operating income. Transactions among segments are made
at fair value.
Significant segment totals are reconciled to the financial statements as follows:
December 31, 2017
Assets
Goodwill and other intangibles ............... $
Total assets .............................................. $
Trust
Segment
Bank
Segment
Retirement
Consulting
Segment
Eliminations
and
Others
Consolidated
Totals
4,426 $
39,120 $
11,261 $ 2,140,508 $
2,645 $
3,365 $
(822) $
45,369
3,935 $ 2,159,069
December 31, 2016
Goodwill and other intangibles ............... $
Total assets .............................................. $
Trust
Segment
Bank
Segment
Retirement
Consulting
Segment
Eliminations
and
Others
Consolidated
Totals
4,681 $
38,235 $
10,980 $ 1,948,800 $
2,884 $
3,528 $
(646) $
45,154
2,805 $ 1,966,113
For year ended 2017
Net interest income.................................. $
Provision for loan losses..........................
Service fees, security gains and other
noninterest income................................
Noninterest expense.................................
Amortization and depreciation
expense .................................................
Income before taxes ...........................
Income tax ...............................................
Net Income......................................... $
Trust
Segment
Bank
Segment
Retirement
Consulting
Segment
Eliminations
and
Others
Consolidated
Totals
109 $
0
73,618 $
3,350
0 $
0
(81) $
0 $
6,548
4,801
15,986
51,284
1,857
1,363
(340) $
1,029 $
277
1,579
455
1,124 $
2,558
32,412
10,509
21,903 $
255
239
(23)
262 $
0 $
(1,450)
(872) $
(578) $
73,646
3,350
24,051
58,477
3,090
32,780
10,069
22,711
102
For year ended 2016
Net interest income.................................. $
Provision for loan losses..........................
Service fees, security gains and other
noninterest income................................
Noninterest expense.................................
Amortization and depreciation
expense .................................................
Income before taxes ...........................
Income tax ...............................................
Net Income......................................... $
Trust
Segment
Bank
Segment
Retirement
Consulting
Segment
Eliminations
and
Others
Consolidated
Totals
95 $
0
68,113 $
3,870
0 $
0
(88) $
0 $
6,341
4,818
15,191
48,804
1,990
1,380
(278) $
1,319 $
305
1,313
462
851 $
2,519
28,111
7,586
20,525 $
307
303
107
196 $
0 $
(1,685) $
(670) $
(1,015) $
68,120
3,870
23,244
56,321
3,131
28,042
7,485
20,557
For year ended 2015
Net interest income.................................. $
Provision for loan losses..........................
Service fees, security gains and other
noninterest income................................
Noninterest expense.................................
Amortization and depreciation
expense .................................................
Income before taxes ...........................
Income tax ...............................................
Net Income......................................... $
Trust
Segment
Bank
Segment
Retirement
Consulting
Segment
Eliminations
and
Others
Consolidated
Totals
65 $
0
49,705 $
3,510
0 $
0
(33) $
0
6,239
4,719
10,192
40,753
2,130
1,487
(255)
4,562
339
1,246
425
821 $
1,759
13,875
2,968
10,907 $
360
283
97
186 $
0
(4,850)
(991)
(3,859) $
49,737
3,510
18,306
51,521
2,458
10,554
2,499
8,055
Bank segment includes Insurance and Investment.
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31
Quarter Ended 2017
Total interest income........................................................... $
Total interest expense..........................................................
Net interest income .............................................................
Provision for loan losses .....................................................
Noninterest income .............................................................
Merger related costs ............................................................
Noninterest expense ............................................................
Income before income taxes ...............................................
Income taxes * ....................................................................
Net income .......................................................................... $
18,850 $
1,319
17,531
1,050
5,887
62
14,551
7,755
1,972
5,783 $
June 30 September 30 December 31
21,084
2,017
19,067
400
6,051
452
14,947
9,319
4,084
5,235
20,551 $
1,876
18,675
950
6,058
270
15,521
7,992
2,009
5,983 $
20,042 $
1,669
18,373
950
6,055
104
15,660
7,714
2,004
5,710 $
Earnings per share - basic and diluted ................................ $
0.21 $
0.21 $
0.22 $
0.19
103
March 31
Quarter Ended 2016
Total interest income........................................................... $
Total interest expense..........................................................
Net interest income .............................................................
Provision for loan losses .....................................................
Noninterest income .............................................................
Merger related costs ............................................................
Noninterest expense ............................................................
Income before income taxes ...............................................
Income taxes .......................................................................
Net income .......................................................................... $
17,747 $
1,000
16,747
780
4,946
289
14,155
6,469
1,671
4,798 $
June 30 September 30 December 31
18,469
1,178
17,291
990
6,076
19
14,981
7,377
2,014
5,363
18,332 $
1,139
17,193
1,110
6,485
31
15,194
7,343
1,967
5,376 $
17,950 $
1,061
16,889
990
5,737
224
14,559
6,853
1,833
5,020 $
Earnings per share - basic and diluted ................................ $
0.18 $
0.19 $
0.20 $
0.20
* Income tax expense for the fourth quarter was elevated due to the additional $1.8 million of tax expense from the
re-measurement of the Company’s net deferred tax asset.
NOTE 23—PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Farmers National Banc Corp. (parent company only). This information
should be read in conjunction with the consolidated financial statements and related notes.
December 31,
BALANCE SHEETS
Assets:
Cash............................................................................................................... $
Investment in subsidiaries
2017
2016
3,614 $
2,620
Bank ......................................................................................................
Trust ...........................................................................................................
NAI ..................................................................................................................
Captive ...................................................................................................................
Securities available for sale.............................................................................................
Other................................................................................................................................
TOTAL ASSETS .................................................................................................
224,843
10,495
2,649
1,584
258
1,442
244,885 $
$
Liabilities:
Other liabilities ..........................................................................................................
Note payable ..............................................................................................................
Subordinate debt ........................................................................................................
Other accounts payable..............................................................................................
TOTAL LIABILITIES.........................................................................................
TOTAL STOCKHOLDERS' EQUITY................................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..............................
250 $
350
2,209
2
2,811
242,074
244,885 $
$
$
198,030
10,184
2,787
646
234
1,284
215,785
57
350
2,160
2
2,569
213,216
215,785
104
STATEMENTS OF INCOME
Years ended December 31,
Income:
Dividends from subsidiaries
2017
2016
2015
8,373 $
825
400
5
0
0
9,603
(103)
(2,294)
Bank..................................................................................... $
Trust..........................................................................................
NAI ................................................................................................
Interest and dividends on securities ........................................................
Security gains/(losses) ............................................................................
Other income...........................................................................................
TOTAL INCOME ......................................................................................
Interest on borrowings ............................................................................
Other expenses ........................................................................................
Income before income tax benefit and undistributed
subsidiary income ...................................................................................
Income tax benefit...................................................................................
7,206
876
Equity in undistributed net income of subsidiaries
(dividends in excess of net income)
Bank ........................................................................................................
Trust...........................................................................................................
NAI ..............................................................................................................
Captive .............................................................................................................
NET INCOME ...........................................................................................
13,529
299
(138)
939
22,711 $
$
5,836 $
820
800
5
(19)
28
7,470
(96)
(1,997)
5,377
670
23,744
750
400
2
0
0
24,896
(35)
(4,817)
20,044
991
14,688
31
(604)
395
20,557 $
(12,837)
71
(214)
0
8,055
STATEMENTS OF CASH FLOWS
Years ended December 31,
Cash flows from operating activities:
Net income ........................................................................................ $
Adjustments to reconcile net income to net cash
from operating activities:
2017
2016
2015
22,711 $
20,557 $
8,055
Security (gains)/losses............................................................
Dividends in excess of net income (Equity in
undistributed net income of subsidiary)..............................
Other.......................................................................................
NET CASH FROM OPERATING ACTIVITIES..............
0
19
0
(14,629)
78
8,160
(14,510)
(368)
5,698
12,980
(269)
20,766
Cash flows from investing activities:
Proceeds from maturities of available for sale securities.........
Net cash paid in business combinations...................................
NET CASH FROM INVESTING ACTIVITIES ...............
0
(1,154)
(1,154)
59
0
59
0
(18,077)
(18,077)
Cash flows from financing activities:
Proceeds from reissuance of treasury shares............................
Repurchase of common shares.................................................
Cash dividends paid .................................................................
NET CASH FROM FINANCING ACTIVITIES...............
NET CHANGE IN CASH AND CASH
EQUIVALENTS
0
0
(6,012)
(6,012)
0
(168)
(4,326)
(4,494)
0
(213)
(2,683)
(2,896)
994
1,263
(207)
Beginning cash and cash equivalents..................................................
Ending cash and cash equivalents ....................................................... $
2,620
3,614 $
1,357
2,620 $
1,564
1,357
105
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective
to ensure that the financial and nonfinancial information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934, as amended, including this Annual Report on Form
10-K for the period ended December 31, 2017, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Management’s responsibilities related to establishing and maintaining effective disclosure controls and
procedures include maintaining effective internal controls over financial reporting that are designed to produce
reliable financial statements in accordance with GAAP. As disclosed in the Report on Management’s Assessment of
Internal Control Over Financial Reporting in the Company’s 2017 Annual Report to Shareholders, management
assessed the Company’s system of internal control over financial reporting as of December 31, 2017, in relation to
criteria for effective internal control over financial reporting as described in the 2013 “Internal Control - Integrated
Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission and found it to be
effective.
Crowe Horwath LLP, the Company’s registered public accounting firm, has audited the Company’s internal
control over financial reporting as of December 31, 2017. The audit report by Crowe Horwath is located in Item 8
of this report.
There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -
15(f) under the Exchange Act) that occurred during the year ended December 31, 2017, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There
have been no significant changes in the Company’s internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation or material weaknesses in such internal controls requiring
corrective actions.
Item 9B. Other Information.
None.
106
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 401 of Regulation S-K concerning the directors of the Company and the
nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on April 19,
2018 (the “2018 Annual Meeting”) is incorporated herein by reference from the information to be included under the
caption “Proposal 1 – Election of Directors” in Farmers’ definitive proxy statement relating to the 2018 Annual
Meeting to be filed with the Commission (“2018 Proxy Statement”).
Executive Officers of the Registrant
The names, ages and positions of Farmers’ executive officers as of March 6, 2018:
Name
Carl D. Culp........................
Age
54
Joseph Gerzina....................
Mark L. Graham .................
Kevin J. Helmick ................
Brian E. Jackson .................
Mark A. Nicastro ................
Michael Oberhaus...............
Joseph W. Sabat..................
Timothy Shaffer..................
Amber Wallace Soukenik ...
Mark J. Wenick...................
Mark R. Witmer..................
62
63
46
48
47
42
57
56
52
58
53
Title
Senior Executive Vice President, Secretary and Treasurer of Farmers and
Senior Executive Vice-President, Cashier and Chief Financial Officer of
Farmers Bank
Senior Vice President, Chief Lending Officer and Regional President of
Farmers Bank
Executive Vice President and Chief Credit Officer of Farmers Bank
President and Chief Executive Officer of Farmers and Farmers Bank
Senior Vice President and Chief Information Officer of Farmers Bank
Senior Vice President and Chief Human Resources Officer of Farmers
Bank
Vice President and Chief Risk Officer of Farmers Bank
Vice President and Controller of Farmers Bank
Senior Vice President and Regional President of Farmers Bank
Executive Vice President and Chief Retail/Marketing Officer of Farmers
Bank
Executive Vice President and Chief Wealth Management Officer of
Farmers Bank
Senior Executive Vice President, Chief Banking Officer of Farmers Bank
Officers are generally elected annually by the Board of Directors. The term of office for all the above
executive officers is for the period ending with the next annual meeting.
Principal Occupation and Business Experience of Executive Officers
Mr. Culp has served as Senior Executive Vice President and Treasurer of Farmers and Senior Executive Vice
President and Chief Financial Officer of Farmers Bank since March 1996. Prior to that time, Mr. Culp was
Controller of Farmers and Farmers Bank from November 1995. Mr. Culp has 32 years of experience in finance and
accounting in the banking industry, and is a certified public accountant.
Mr. Gerzina currently serves as Regional President and Chief Lending Officer, and brings 35 years of
experience in commercial and private banking. Prior to joining Farmers Bank, Mr. Gerzina was a Managing Partner
at Weather Vane Capital, and previously held the role of Senior Vice President and Regional Commercial Manager
(2002-2009) with Huntington National Bank. He was appointed as an executive officer of Farmers in 2012.
Mr. Graham has over 40 years of experience with Farmers Bank. During his tenure, Mr. Graham has held a
variety of positions in Farmers Bank’s commercial loan department. Mr. Graham has served as Executive Vice
President and Chief Credit Officer of Farmers Bank since January 2012; for the four years prior to that appointment,
Mr. Graham served as Senior Vice President and Senior Lending Officer of Farmers Bank.
107
Mr. Helmick is the President and Chief Executive Officer of Farmers and Farmers Bank, a position he has
held since November 2013. Prior to becoming President, Mr. Helmick was Secretary of Farmers and Executive
Vice President – Wealth Management and Retail Services of Farmers Bank since January 2012. Mr. Helmick has
been with the Company for 23 years and has a retail and investment background, including an MBA and CFP
designation. From 1997 through 2008, Mr. Helmick served as the Vice President and Program Manager for
Investments. In 2008 Mr. Helmick was promoted to Senior Vice President of Wealth Management and Retail
Services where he was responsible for the management and oversight of Investments, the retail investment area of
Farmers Bank, Insurance, and all branch sales and operational functions.
Mr. Jackson is the Senior Vice President and Chief Information Officer of Farmers Bank, a position he has
held since May 2009. Prior to coming to the Company, Mr. Jackson was Assistant Vice President and Information
Technology Manager with Home Savings Bank since 1993. He has over 25 years of experience in the IT field.
Mr. Jackson was appointed as an executive officer in 2012.
Mr. Nicastro is the Senior Vice President and Chief Human Resources Officer of Farmers Bank. Mr. Nicastro
was appointed to that position in 2017 and previously served as Director of Human Resources since joining Farmers
in July 2009. Prior to that, Mr. Nicastro served as Staffing and Compliance Manager for Huntington National Bank
(2007-2008) and Regional Human Resources Manager for Sky Bank from 2004 until 2007. Mr. Nicastro has an
MBA, and has more than 20 years of experience in Human Resource Management from both large multi-national
banks and regional community banks. He was appointed as an executive officer in 2012.
Mr. Oberhaus is currently the Vice President and Chief Risk Officer of Farmers Bank. Mr. Oberhaus joined
Farmers National Bank as part of the merger with First National Bank of Orrville in June of 2015 as the company’s
Enterprise Risk Manager. Prior to the merger Mr. Oberhaus served as the SVP and Chief Risk Officer of First
National Bank of Orrville and brings more than 20 years of experience in banking.
Mr. Sabat has served as Vice President and Controller of Farmers Bank since April 2006. Prior to coming to
the Company, Mr. Sabat was with a regional public accounting firm. Mr. Sabat has 22 years of experience in the
accounting, finance and auditing fields. He is a certified public accountant and was appointed as an executive
officer in 2012.
Mr. Shaffer serves as Regional President and has held that title since July of 2015. Previously, Mr. Shaffer
served as the Director of Commercial Banking & Private Client Services. In October of 2011, Mr. Shaffer joined
Farmers Bank as the Commercial Lending Manager, overseeing commercial lending, small business lending and
treasury management. Mr. Shaffer has over 28 years of Banking and Lending experience in the Mahoning Valley
market. Mr. Shaffer was appointed as an executive officer in 2014.
Ms. Wallace Soukenik has served as Executive Vice President and Chief Retail/Marketing Officer for Farmers
Bank since November 2013. In August 2008 Ms. Wallace Soukenik joined Farmers Bank as Senior Vice President
and Director of Marketing. She has 28 years of experience in the marketing field. Prior to joining the Company,
Ms. Wallace Soukenik served as the Assistant Vice President of Marketing and Physician Relations at Trumbull
Memorial Hospital, where she managed a $14 million endowment, a $1.5 million marketing budget and all
physician contracts. She was appointed as an executive officer in 2012.
Mr. Wenick is Senior Vice President and Chief Wealth Management Officer of Farmers Bank. Prior to
coming to Farmers National Bank in 2017, Mr. Wenick was regional president of Chemical Bank for 3 years. Prior
to that, Mr. Wenick spent 5 years in local bank investment and trust positions. He brings more than 35 years of
financial expertise in the area of wealth management.
Mr. Witmer is the Senior Executive Vice President and Chief Banking Officer of Farmers National Bank. Mr.
Witmer joined Farmers National Bank as part of the merger with First National Bank of Orrville in June of 2015.
Prior to the merger, Mr. Witmer served as the Chief Executive Officer of First National Bank of Orrville. Mr.
Witmer has more than 26 years of leadership, community banking and lending experience.
108
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended.
The information required by Item 405 of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2018
Proxy Statement.
Code of Business Conduct and Ethics.
The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that covers all
employees, including its principal executive, financial and accounting officers, and is posted on the Company’s
website www.farmersbankgroup.com. In the event of any amendment to, or waiver from, a provision of the Code of
Ethics that applies to its principal executive, financial or accounting officers, the Company intends to disclose such
amendment or waiver on its website.
Procedures for Recommending Directors Nominees.
Information concerning the procedures by which shareholders may recommend nominees to Farmers’ Board
of Directors is incorporated herein by reference from the information to be included under the caption “Director
Nominations” in 2018 Proxy Statement. These procedures have not materially changed from those described in
Farmers’ definitive proxy materials for the 2017 Annual Meeting of Shareholders.
Audit Committee.
The information required by Items 407(d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference
from the disclosure to be included under the caption “Committees of the Board of Directors – Audit Committee” in
the 2018 Proxy Statement.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the captions “Compensation Discussion and Analysis” and “Executive
Compensation and Other Information” in the 2018 Proxy Statement.
The information required by Item 407(e)(4) of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “Compensation Committee Interlocks and Insider Participation” in the
2018 Proxy Statement.
The information required by Item 407(e)(5) of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “The Compensation Committee Report” in the 2018 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information required by Item 201(d) of Regulation S-K is incorporated herein by reference from the
disclosure included under the caption “Equity Compensation Plan Information” in the 2018 Proxy Statement of the
Company.
The information required by Item 403 of Regulation S-K is incorporated herein by reference from the
disclosure included under the caption “Beneficial Ownership of Management and Certain Beneficial Owners” in the
2018 Proxy Statement of the Company.
109
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by Item 404 of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “Certain Relationships and Related Transactions” in the 2018 Proxy
Statement.
The information required by Item 407(a) of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “The Board of Directors — Independence” in the 2018 Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated herein by reference from the disclosure to be
included under the captions “Independent Registered Public Accounting Firm Fees” and “Pre-Approval of Fees” in
the 2018 Proxy Statement.
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)(1) Financial Statements
Item 8 Reference is made to the Consolidated Financial Statements included in Item 8 of Part II
herein.
(2) Financial Statement Schedules
No financial statement schedules are presented because they are not applicable.
(3) Exhibits
The exhibits filed or incorporated by reference as a part of this Annual Report on Form 10-K are
listed in the Exhibit Index, which follows and is incorporated herein by reference.
(b)Exhibits
The exhibits filed or incorporated by reference as a part of this Annual Report on Form 10-K are
listed in the Exhibit Index, which follows and is incorporated herein by reference.
(c)Financial Statement Schedules
See subparagraph (a)(2) above.
Item 16. Form 10-K Summary.
None.
110
The following exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K:
INDEX TO EXHIBITS
Exhibit
Number
Description
2.1
3.1
3.2
3.3
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Agreement and Plan of Merger by and among Monitor Bancorp, Inc., Farmers National Banc Corp. and
FMNB Merger Subsidiary II, LLC, dated as of March 13, 2017 (incorporated by reference from Exhibit
2.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 17, 2017)
Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from
Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on
October 3, 2001 (File No. 333-70806)).
Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by
reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on
May 1, 2013).
Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from
Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011
filed with the Commission on August 9, 2011).
Farmers National Banc Corp. 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.1
to Farmers’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed with the
Commission on August 8, 2012).
Farmers National Banc Corp. Cash Incentive Plan (incorporated by reference from Exhibit 10.1 to
Farmers’ Current Report on Form 8-K filed with the Commission on June 24, 2011).
Farmers National Banc Corp. Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to
Farmers’ Current Report on Form 8-K filed with the Commission on June 29, 2011).
Farmers National Banc Corp. Nonqualified Deferred Compensation Plan (as amended and restated
effective January 1, 2016) (incorporated by reference from Exhibit 10.4 to Farmers’ Annual Report on
Form 10-K for the year ended December 31, 2016 filed with the Commission on March 7, 2017).
Farmers National Banc Corp. 2015 Form of Cash Long-Term Incentive Award Agreement under Long-
Term Incentive Plan (incorporated by reference from Exhibit 10.9 to Farmers’ Annual Report on Form
10-K for the year ended December 31, 2015 filed with the Commission on March 10, 2016).
Farmers National Banc Corp. 2015 Form of Equity Long-Term Incentive Award Agreement under 2012
Equity Incentive Plan (incorporated by reference from Exhibit 10.10 to Farmers’ Annual Report on
Form 10-K for the year ended December 31, 2015 filed with the Commission on March 10, 2016).
Farmers National Banc Corp. 2015 Form of Notice of Grant and Restricted Stock Award Agreement
under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.1 to Farmers’ Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2015).
Farmers National Banc Corp. 2016 Form of Notice of Grant and Restricted Stock Award Agreement
under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.8 to Farmers’ Annual
Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on March 7,
2017).
Farmers National Banc Corp. 2016 Form of Cash Long-Term Incentive Award Agreement under Long-
Term Incentive Plan (incorporated by reference from Exhibit 10.9 to Farmers’ Annual Report on Form
10-K for the year ended December 31, 2016 filed with the Commission on March 7, 2017).
111
Exhibit
Number
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
21
23
24
31.1
31.2
Description
Farmers National Banc Corp. 2016 Form of Service-Based Long-Term Equity Incentive Award
Agreement under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.10 to Farmers’
Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on
March 7, 2017).
Farmers National Banc Corp. 2016 Form of Performance-Based Long-Term Equity Incentive Award
Agreement under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.11 to Farmers’
Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on
March 7, 2017).
Farmers National Banc Corp. 2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.1
to Farmers’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed with the
Commission on August 8, 2017).
Farmers National Banc Corp. 2017 Form of Notice of Grant of Long-term Incentive Plan Awards under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.2 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on August 8, 2017).
Farmers National Banc Corp. 2017 Form of Notice of Grant of Long-term Incentive Plan Awards under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.3 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on August 8, 2017).
Farmers National Banc Corp. 2017 Form of Service-Based Restricted Stock Award Agreement under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.4 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on August 8, 2017).
Farmers National Banc Corp. 2017 Form of Performance-Based Equity Award Agreement under 2017
Equity Incentive Plan (incorporated by reference from Exhibit 10.5 to Farmers’ Quarterly Report on
Form 10-Q filed with the Commission on August 8, 2017).
Nonemployee Director Compensation (incorporated by reference from Exhibit 10.12 to Farmers’ Annual
Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on March 7,
2017).
Farmers National Banc Corp. Form of Indemnification Agreement (incorporated by reference from
Exhibit 10.1 to Farmers’ Current Report on Form 8-K filed with the Commission on April 29, 2011).
Farmers National Banc Corp. Amended and Restated Executive Separation Policy (incorporated by
reference from Exhibit 10.2 to Farmers’ Quarterly Report on Form 10-Q filed with the Commission on
November 9, 2015).
Change in Control Agreement with Kevin J. Helmick (incorporated by reference from Exhibit 10.2 to
Farmers’ Current Report on Form 8-K filed with the Commission on November 14, 2013).
Form of Change in Control Agreements for Executive Officers (incorporated by reference from Exhibit
10.3 to Farmers’ Current Report on Form 8-K filed with the Commission on November 14, 2013).
Subsidiaries of Farmers (filed herewith).
Consent of Independent Registered Public Accounting Firm (filed herewith).
Powers of Attorney of Directors and Executive Officers (filed herewith).
Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of
Farmers (principal executive officer) (filed herewith).
Rule 13a-14(a)/15d-14(a) Certification of Carl D. Culp, Executive Vice President and Treasurer of
Farmers (principal financial officer) (filed herewith).
112
Exhibit
Number
32.1
32.2
Description
Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive
Officer of Farmers (principal executive officer) (filed herewith).
Certification pursuant to 18 U.S.C. Section 1350 of Carl D. Culp, Executive Vice President and
Treasurer of Farmers (principal financial officer) (filed herewith).
101.INS
XBRL Instance Document (filed herewith).
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
* Constitutes a management contract or compensatory plan or arrangement.
Copies of any exhibits will be furnished to shareholders upon written request. Request should be directed to Carl D.
Culp, Senior Executive Vice President and Treasurer, Farmers National Banc Corp., 20 S. Broad Street, Canfield,
Ohio 44406.
113
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the under signed, thereunto duly authorized.
SIGNATURES
FARMERS NATIONAL BANC CORP.
By /s/ Kevin J. Helmick
Kevin J. Helmick, President and Chief
Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Kevin J. Helmick
Kevin J. Helmick
/s/ Carl D. Culp
Carl D. Culp
President, Chief Executive Officer and Director
(Principal Executive Officer)
Senior Executive Vice President, Secretary and
Treasurer
(Principal Financial Officer)
/s/ Joseph W. Sabat*
Joseph W. Sabat
Controller
(Principal Accounting Officer)
/s/ Gregory C. Bestic*
Gregory C. Bestic
Director
/s/ Anne Frederick Crawford* Director
Anne Frederick Crawford
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
/s/ Lance J. Ciroli*
Lance J. Ciroli
/s/ Ralph D. Macali*
Ralph D. Macali
/s/ Terry A. Moore*
Terry A. Moore
/s/ Edward W. Muransky*
Edward W. Muransky
/s/ David Z. Paull*
David Z. Paull
/s/ Earl R. Scott*
Earl R. Scott
/s/ James R. Smail*
James R. Smail
/s/ Gregg Strollo*
Gregg Strollo
Chairman of the Board
March 6, 2018
Director
Director
Director
Director
Director
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
Vice Chairman of the Board
March 6, 2018
Director
March 6, 2018
*
The above-named directors and officers of the Registrant sign this Annual Report on Form 10-K by Kevin J.
Helmick and Carl D. Culp, their attorney-in-fact, pursuant to Powers of Attorney signed by the above-named
directors and officers, which Powers of Attorney are filed with this Annual Report on Form 10-K as exhibits,
in the capacities indicated.
114
By
/s/ Kevin J. Helmick
Kevin J. Helmick
President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ Carl D. Culp
Carl D. Culp
Senior Executive Vice President, Secretary
and Treasurer
(Principal Financial Officer)
115
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A N N U A L R E P O R T 2 0 1 7
A N N U A L R E P O R T 2 0 1 7
Corporate Profile
Farmers National Banc Corp. (the “Company”) is a multi-bank holding company registered under the Bank
Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally
chartered subsidiary, The Farmers National Bank of Canfield (“Farmers National Bank”.) The Company provides
trust services through its subsidiary, Farmers Trust Company, retirement planning and consultancy services
through its subsidiary, National Associates, Inc. and insurance services through Farmers National Bank’s
subsidiaries, Farmers National Insurance, LLC, and Bowers Insurance Agency, LLC. Farmers Trust Company
has a state-chartered bank license to conduct trust business from the Ohio Department of Commerce – Division
of Financial Institutions.
Farmers National Bank, chartered in 1887, is a full-service financial services company engaged in commercial
and retail banking with a total of forty-one (41) locations and four (4) trust offices located in the counties of
Mahoning, Trumbull, Columbiana, Stark, Summit, Wayne, Medina, Holmes and Cuyahoga in the State of
Ohio and Beaver in Pennsylvania. In addition, Farmers National Bank provides 24-hour access to a network
of Automated Teller Machines and offers online, mobile and telephone banking services. Farmers National
Bank competes with state and national banks, as well as with a large number of other financial institutions,
such as thrifts, insurance companies, consumer finance companies, credit unions and commercial finance
leasing companies for deposits, loans and other financial service businesses. The principal methods by which
Farmers National Bank competes are loan interest rates, the rates paid for funds, the fees charged for services
and the availability of services.
As a national banking association, Farmers National Bank is a member of the Federal Reserve System, is
subject to the supervision and regulation of the Office of the Comptroller of the Currency, and deposits are
insured by the Federal Deposit Insurance Corporation to the extent provided by law.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are not historical facts, but rather statements based on Farmers’ current
expectations regarding its business strategies and its intended results and future performance. Forward-
looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar
expressions, as well as any statements related to future expectations of performance or conditional verbs,
such as “will,” “would,” “should,” “could” or “may.”
Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could
cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from
those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these
differences include, without limitation, general economic conditions, including changes in market interest rates
and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes;
competitive conditions in the banking markets served by Farmers’ subsidiaries; the adequacy of the allowance
for losses on loans and the level of future provision for losses on loans; and other factors disclosed periodically
in Farmers’ filings with the SEC.
Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to
place undue reliance on them, whether included in this report or made elsewhere from time to time by Farmers
or on Farmers’ behalf. Farmers assumes no obligation to update any forward-looking statements.
Investor Information
Corporate Headquarters:
Farmers National Banc Corp.
20 South Broad Street, P.O. Box 555
Canfield, OH 44406
Phone 330-533-3341
Toll Free 1-888-988-3276
Website: www.farmersbankgroup.com
Dividend Payments: Subject to the approval of the
Board of Directors, quarterly cash dividends are
customarily payable on or about the 30th day of
March, June, September and December.
Transfer Agent: Computershare Investor Services
P.O. Box 30170, College Station, TX 77842
Dividend Reinvestment Plan (DRIP): Registered
shareholders can purchase additional common
shares through Farmers’ Dividend Reinvestment Plan.
Participation is voluntary and allows for automatic
reinvestment of cash dividends and the safekeeping
of share certificates. To obtain a prospectus, contact
the Computershare Investor Services at 877-581-5548.
Direct Deposit of Cash Dividends: The direct
deposit program, which is offered at no charge,
provides for automatic deposit of quarterly dividends
directly to a checking or savings account. For
information regarding this program, please contact
the Computershare Investor Services at 877-581-5548.
Annual Report on Form 10-K: A copy of the Annual
Report on Form 10-K filed with the Securities and
Exchange Commission will be provided to any
shareholder on request to the attention of: Mr. Carl D.
Culp, Farmers National Banc Corp., 20 South Broad
Street, P.O. Box 555, Canfield, OH 44406.
Common Stock Listing and Information as to
Stock Prices and Dividends:
The Company’s common shares trade on the
NASDAQ Capital Market under the symbol FMNB.
Set forth in the accompanying table are per share
prices at which common shares have actually been
purchased and sold in transactions during the
periods indicated, to the knowledge of the Company.
Also included in the table are dividends per share
paid on the outstanding Company’s common shares
and any shares dividends paid. As of December 31,
2017, there were 27,544,049 shares outstanding and
3,460 shareholders of record of common shares.
The following graph compares the cumulative five year total return
to shareholders on Farmers National Banc Corp.’s common shares
relative to the cumulative total returns of the NASDAQ Composite
index, the NASDAQ Bank index and the SNL Microcap Bank
index. The graph assumes that the value of the investment in the
Company’s common shares and in each of the indexes (including
reinvestment of dividends) was $100 on 12/31/2012 and tracks
it through 12/31/2017.
Quarter EndingHighLowDividendMarch 2017June 2017September 2017December 2017March 2016June 2016September 2016December 2016$14.90$15.25$15.65$15.95$9.03$9.68$11.82$15.50$12.13$12.65$12.90$13.35$8.00$8.54$8.66$9.98$0.05$0.05$0.06$0.06$0.04$0.04$0.04$0.04MARKET AND DIVIDEND SUMMARY Period EndingIndex 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17Farmers National Banc Corp. 100.00 107.68 139.42 145.71 244.32 257.83NASDAQ Composite Index 100.00 140.12 160.78 171.97 187.22 242.71SNL U.S. Bank NASDAQ Index 100.00 143.73 148.86 160.70 222.81 234.58SNL Microcap Bank Index 100.00 129.02 146.32 162.71 200.04 244.72Source: S&P Global Market Intelligence © 2017 50 100 150 200 250 300 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 Farmers National Banc Corp.NASDAQ Composite IndexSNL U.S. Bank NASDAQ IndexSNL Microcap Bank Index Farmers National Banc Corp.
20 South Broad Street P.O. Box 555 Canfield, Ohio 44406